Micron Technology (MU) presents a view to what happens when you have a great company in a really crowded space. The share prices of many semiconductor manufacturers have suffered in the last few years as a result of oversupply, the resulting thin margins and decreases in sales revenues brought on by the domestic recession and the Euro-zone crisis. Micron, like its peers, Sandisk (SNDK), Intel (INTC) and Advanced Micro-Devices (AMD) are all facing serious challenges with respect to opening up new markets and servicing the demand for new and better technologies to feed the demand from mobile and cloud computing markets.
Micron manufactures and markets semiconductor devices, Dynamic Random Access Memory (DRAM), NAND Flash and NOR Flash memory, and other memory technologies, packaging and semiconductor systems for use in computing, consumer, networking, automotive, industrial and mobile products.
Seven consecutive quarters of slower growth in China will put a strain on every company in the technology sector. Europe has been the biggest drain on company revenues and the bottom line earnings but China's slowdown is beginning to be one of the bigger obstacles for global companies. Europe is a big trade partner with China and the inability to contain the debt crisis in Europe has triggered a slowdown in China which will impact technology sector companies for some time to come. Micron has heavy exposure to the Asia Pacific region. As does Intel and Advanced Micro Devices both of which predict lower earnings estimates as a result of slower growth in China.
A growth area for chip makers is smart-phones and other mobile and tethering devices. Maxim Integrated Products (MXIM) and Avago Technologies Limited (AVGO) represent 40% of the supply to that market. Industrial and communications markets are not growing and that is where Micron has derived its revenues. Intel's exposure to the mobile markets is also limited. Having exposure in the mobile market will provide growth opportunities to chip manufacturers. As such, Micron has appointed a new vice president in charge of providing chips to the global mobile device market.
Micron is trying to acquire bankrupt Japanese DRAM chip maker Elipida to give the company more flexibility in manufacturing memory technologies and to capitalise on Elipda's agreement to supply all Apple (AAPL) devices with new SDRAM. The exposure to mobile markets, especially to the extent that Apple's devices strengthen Micron's position relative to chip makers that do not have mass mobile penetration for their products. The acquisition is expected to close in the first half of 2013.
The company as had a hold rating reiterated by TheStreet.com despite its earnings drop the rating is based on good cash flow from operations, and its debt service levels which are partially offset by deteriorating net income, disappointing return on equity and low profit margins. Which makes it exactly the same as many other companies in this space.
JPMorgan lowered its price expectation from $8.50 to $7.50 for the near term because of its lack of traction in the smart phone market as well as weakness in the DRAM market. Micron's NAND and NOR demand is stable and DRAM demand is expected to increase with Microsoft's (MSFT) release of Windows 8. It is expected that the acquisition of Elpida will improve Micron's mobile traction.
Micron's fourth quarter and fiscal 2012 results at August 31, 2012 showed a net loss of $243 million, or $0.24 per share, on net sales of $2.0 billion compared to a net loss of $135 million, or $0.14 per share, on net sales of $2.1 billion for the fourth quarter of fiscal 2011.
Revenues from sales of NAND Flash products were 14% higher in fiscal 2012 than 2011 as a result of a 106% increase in unit sales resulting from the ramp of the IM Flash wafer manufacturing in Singapore. This was partially offset by a 45 % decrease in average selling prices. Revenues from DRAM products were 12% lower in fiscal 2012 compared to fiscal 2011 due to a decrease in average selling prices.
Sales of NOR Flash products comprised approximately 12% of total net sales in the quarter. The company's consolidated gross margin of 11 percent in the fourth quarter of fiscal was unchanged from the third quarter of fiscal 2012. Improvements in margin from sales of NAND Flash and NOR Flash products were offset by declines in margins from sales of DRAM products.
Cash flows from operations for the fourth quarter of fiscal 2012 were $450 million. During the fourth quarter of fiscal 2012, the company invested $372 million in capital expenditures and ended the quarter with cash and investments of $2.9 billion. For all of fiscal 2012, the company invested approximately $1.9 billion in capital expenditures.
The stock trades around $5.90, has a 52 week range of $9.16 and $5.06. It has negative earnings per share of -$1.04 and does not pay a dividend. Micron Technologies has total cash of $2.56 billion and total debt of $3.26 billion. The current ratio is 1.57 and the book value per share is $7.60. The company is 86.7% owned by institutions and 2.62% owned by insiders. The float is 8% short as of September 15, 2012.
Micron's stock is stuck trading at the low end of its yearly range. A quick glance at the financials such as the one above doesn't look all that bad. The negative earnings growth is a concern and will remain a concern as the company will have to continue to make expenditures to penetrate new markets. Even then, it will still be faced with the constant black cloud of oversupply and extremely thin margins in order to remain competitive in the industry. At some point in time, other industries, other uses, other demands will impact positively on the industry as a whole, in the current economic environment, the time horizon is somewhere in the next 24 to 36 months for things to improve in a meaningful way.
Micron has adequate capital to cover current liabilities and it has cash flow that will sustain it as long as things don't get worse. It is making calculated acquisitions meant to increase market share and control costs and it has demonstrated its ability to be successful in those undertakings. The company is not the problem here, the economy and the capital markets are. There is nothing of any consequence or importance on the horizon that will make the manufacture of semi conductors more cost effective or more in demand.
The slowdown in China will not show any real cumulative negative impact until at least the end of the first half of 2013. There is no good news coming and the chip makers themselves have said that there is little relief in sight for better growth and earnings. I have to agree with the hold rating, failing that, if you are not in the sector, there are some opportunities to pick low hanging fruit, but diminish your expectations, as there are no big wins in the near future. Micron is a buy and hold scenario, not a trading opportunity.