Needham's Rajvindra Gill has launched coverage on Micron (MU +1.8%) with a Buy and $30 PT, while asserting the DRAM/NAND flash vendor could see its gross margin eventually rise to 40% from a current ~30%.
Gill points out rising estimates (aided by the Elpida deal) have led Micron's forward P/E (based on FY15 estimates) to fall to 9 from a July level of 15, in spite of the ongoing rally seen by its shares. He argues Micron should trade at 12x-14x EPS and 3x-4x its tangible book value.
Echoing David Einhorn and others, Gill declares the newly consolidated DRAM industry is "entering a period of rationality that will focus on [ROIC] as opposed to market share or survival." He also expects the lion's share of DRAM and NAND capex to be directed towards technology upgrades rather than capacity investments. Micron set a market-pleasing FY14 capex budget of $2.6B-$3.2B in July.
Margin improvements are expected to be driven not only by supply controls, but by a NAND mix shift towards SSDs and cost cuts at Elpida.
Also: 1) Digitimes reports SK Hynix (HXSCL), still dealing with the fallout from a massive fire at a Chinese fab, is unable to meet demand from its PC OEM clients. 2) DRAMeXchange reports PC DRAM contract prices ticked higher in 2H November, and are likely to be flat or up in December.