Over the last couple of months, the price decline in DRAM has been a major point of concern for manufacturers. The primary reason behind this decline is the overcapacity in the DRAM industry, combined with a significant decline in PC sales. The industry dynamics are shifting; computing is shifting to handheld devices, which is creating problems for those manufacturers who focused on PCs. The shortages in the storage industry due to floods in Thailand and the slowdown in PC manufacturing had caused an overcapacity in DRAM. OEM (Original Equipment Manufacturers) usually keep inventories of four to six weeks, whereas Micron (MU) currently has an inventory of two to three months. The price-cuts due to overcapacity should not be underestimated. The industry is ripe for consolidation, and we believe that Micron is very well placed, due to their bid for Elpida Memory (OTC:ELPDF). We believe when this acquisition comes through, it would greatly improve pricing capability of Micron, and give it more control over the industry. Despite the current hiccups, investors should expect this acquisition to finalize soon, and that makes us bullish on Micron. The launch of Windows 8 will also serve as a bullish catalyst for Micron, as it will cause the decline in PC sales to stabilize.
Micron announced its fourth quarter results in which it missed analyst expectations. The company reported revenues of $1.96 billion, which is an 8% decrease YoY, and a decrease of approx. 10% from previous quarter's revenues of $2.2 billion. Analysts were expecting revenues of $2.17 billion for the quarter.
Source: Yahoo Finance
As the table shows, the company has a terrible history when it comes to meeting analyst expectations, and has missed estimates in all of the last four quarters. In the quarter ending August, analysts were expecting an EPS of $-0.23, but the company reported $-0.24. The primary reason for missing targets is the unexpected decline in DRAM demand, which was down further by 9%. NAND segment contributes more than 50% to MU's revenues, and a price decline of 5% during the quarter was a major concern for Micron.
The key to industry stabilization remains consolidation. The reduced price margin would be stabilized by a reduction in the number of industry players, which would result in a better price bargain. Micron-Elpida deal has faced a lot of problems in the last few months. The primary obstacles remain Elpida's bondholders, who are insisting on a better deal for the Japanese semiconductor manufacturer. These bondholders recently brought their contention to U.S. courts, in a bid to terminate the $2.5 billion deal. We believe that the deal will sustain, as similar attempts by bondholders have failed in the past.
The stock is currently trading at a P/E of 9x, as compared to the industry average of 15x. We believe the Elpida acquisition puts Micron in a very good position in the DRAM industry. The company would also benefit greatly from the upcoming launch of Windows 8. Therefore, we maintain our buy rating on Micron.