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Avoid Micron at Your Own Risk


It may be underestimated.

Dear Prof. Curtis,

In response to your Five Reasons Micron Is Held Up Only by Hope:

Having read your commentary on the stock yesterday and with the company having reported last night, I thought I'd address concerns on the name.

1. Missing Street Consensus Estimates

Missing Street numbers is easy in both directions.

Micron (MU) doesn't exactly provide anything you'd call guidance on their conference calls so the sell-side numbers are generally all over the map for any given quarter. What's provided by management is a rough estimate of expected bit growth for DRAM and NAND flash along with some ballpark numbers on opex.

In fiscal fourth quarter it was expected to lose $0.19 but the loss per share was "only" $0.10. The quarter prior to that (fiscal third quarter) consensus was $0.62 and they reported $0.36. And as we saw last night, both earnings and EPS were well above the Street.

The Street consensus is rarely correct with its numbers so it's best just to watch memory pricing. What's missed by the Street is the extraordinary leverage in both directions in Micron's business model.

2. EPS Estimate for Fiscal Years 2010 and 2011 Are Nothing to Get Worked Up About

I agree with you on that note but given my previous comments, these numbers really aren't worth the paper they're printed on.

Again, as we saw last night, if nothing changed for the next three quarters, you're already looking at about $1 per share for the current fiscal year, or about three times the estimates the Street had in place as of Tuesday.

Given the leverage in the business model, you're currently looking at a stock valued at about nine times fiscal year 2010 earnings, but I doubt you'll see revenue and margins "flatline" from here.

3. Cash Position

You're correct that no one is getting worked up about their cash position, and that cash is needed to fund capital spending programs. But what's important is that they have it and they continue to generate it from operations, unlike some of their competitors.

4. The Stock and the Market Have Both Had Big Moves

True, the stock's been on a tear this year (+250%) versus 20% to 40% for the broader market indices. But the reality is that most of Micron's gains are the result of a 200% increase in DRAM prices year-to-date and 130% to 150% gains on the NAND side.

DRAM and NAND are commodities. Just like gold, oil, aluminum, and pork bellies, price is a function of supply and demand.

5. The Unknown Catalyst?

There's really nothing unknown about it and it's something I've written about on these pages before.

What the changes in DRAM and NAND prices have been telling us all year is that supply is being reduced as excess capacity is taken off the markets. Citigroup estimates as much as 22% of DRAM capacity has gone by the wayside along with another 14% of NAND flash capacity. It's not sitting idle on the sidelines. Micron's management indicated that any idle capacity capable of returning has returned already.

But the more critical element is that all capacity is not created equal. OEM demand has shifted dramatically to DDR3, the latest DRAM technology. Most of the Taiwanese producers aren't capable of producing DDR3 and a number of them don't have the financial wherewithal to do so.

What we've seen in the pricing markets have run contrary to the seasonal norms. Traditionally, by mid- to late November the holiday build has ended and the pressure is off. With that seasonal swing, contract memory prices weaken from late November into the new year.

However, contract DRAM prices have not pulled back and in fact have remained flat since early November. NAND contract are down only modestly. Based on the comments from Micron's management last night, OEM demand is above expectations. I wonder what will happen when the economy recovers?

Hope this helps!

-Prof. Bob Faulkner

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