Technology

Why Analysts Have Such Mixed Emotions on Micron Earnings and Turnaround

Jon C. Ogg

Published: June 29, 2016 1:00 pm

Last Updated: January 13, 2020 6:13 am

Micron Technology, Inc. (NASDAQ: MU) is set to launch the unofficial start of earnings season this week when it reports earnings on Thursday. Technically earnings season will not begin for another two weeks, but this company being so deeply tied to DRAM and NAND memory makes it an integral part of the technology economy. It is also the first industry-wide chip earnings view that investors will have seen in weeks.

24/7 Wall St. wanted to see several issues here. First is what the official estimates are, and then how Micron’s stock has acted. We also included several analyst report quotes and observations from June that should give investors a good base of what they should be expecting.

The Thomson Reuters consensus estimates for the third quarter (ending May) are -$0.09 EPS (down from a gain of $0.54 last year) and revenues are expected to be $2.95 billion (down 23% from a year ago). Estimates for the coming August quarter are $0.03 EPS, signaling a return to profitability) and $3.20 billion in revenues. Micron watchers and investors should keep in mind that the delayed Inotera acquisition could influence future quarters and guidance, and Wall Street analysts are often atrocious at modeling in ups and downs based upon business acquisitions and combinations.

Micron’s last share price of $13.25 is compared to a 52-week range of $9.31 to $20.57, but that is way down from highs around $35.00 at the end of 2014.

Micron’s stock chart is also fighting right around the 200-day moving average. As of Wednesday, that key 200-day average was $13.02. Micron’s shares were up at $14.00 last week and dipped down under $12.50 on the post-Brexit trading before recovering to $13.25 on last look.

Micron is one of the chip companies that always remains with an elevated short interest as well. The June 15 settlement date had a short interest of 63.7 million shares. That represents 2.62 days to cover and is more or less in line with the average short interest levels seen in 2016.

Then there is a very mixed bag among analysts on Wall Street. Micron’s consensus analyst price target is now only $15.00. That target has drifted lower throughout 2015 and 2016, and now Micron is selling like a hybrid between a value stock and a turnaround stock. There are 17 analysts rating it with various iterations of a Buy rating, 9 Hold or Neutral ratings, and 5 analysts with iterations of a Sell rating.

Wedbush Securities previously had a Neutral rating, but the firm dropped coverage due to an analyst departure. As such, the last recommendation and the estimates and price targets should not be relied upon going forward.

BofA Merrill Lynch issued a report on June 25 covering Micron among many global chip names in the Brexit wake. While they see a low Brexit impact for chips, Merrill Lynch has an Underperform rating and has a mere $10.00 price objective. The firm said:

We don’t expect any surprises from the results call – operating losses for two consecutive quarters. That said, we think management could reiterate its positive stance on second half earnings recovery on the back of mass production of 3D NAND and 20nm DRAM. Meanwhile, we are still concerned over execution risk in deploying new tech… Our forecast still reveals low- to mid-single digits ROE but larger loss can easily happen if there is a downturn coupled with competitors’ more aggressive chip price cut.

On June 27, Credit Suisse reiterated its Outperform rating and $20.00 price target. The firm expects that a bottoming out in the business has been seen, but they are not expecting a big bounce back up in the business. Credit Suisse’s report said:

We expect Micron to roughly meet third quarter revenue and earnings guidance and expect fourth quarter guidance to confirm a third quarter bottom as 20nm DRAM ramps albeit absolute fourth quarter revenue and earnings will likely miss Street and more recent bullish expectations – we expect EPS of $0.00-($0.05) versus street of $0.04.

We believe that MU is near trough valuations and see fundamentals improving from here – specifically, (1) we expect pricing to start stabilizing after MayQ and drive margin improvement for MU, (2) structurally, Memory is a different industry now – higher concentration than ever (HHI 3,300 now versus only 1,900 in 2007), more diversified demand, and slowing supply – we argue margins are more resilient now than in the past, and expect a re-rating as investors realize normalized earnings of >$2 per year and (3) we continue to argue that strategic value continues to be under-appreciated, particularly given China’s interest is Memory.

On June 25 the team at S&P Capital IQ maintained its Hold rating, but the $11.000 price target was under the $13.21 share price of that time. Its longer-term outlook said:

We forecast that revenues will decline 20% in Fiscal Year 2016 (Aug.), but rebound 12% in Fiscal Year 2017. We remain cautious about growth prospects within the DRAM space given end-demand uncertainty and increasing competitive threats to personal computers. Despite this, growth in mobile DRAM, technology transitions and limited competition in the space should provide some downside support during periods of sharp pricing declines. We like Micron’s increasing focus on the higher growth potential flash memory business, which should be supported by end-market growth for mobile devices. Micron is making good progress on growing its solid state business, we think.

In mid-June, Morgan Stanley maintained its Overweight rating and $18.00 price target. This is actually a better view on Micron than on the sector as a whole because Morgan Staley has an In-Line industry view. Its report said:

Delays in the Inotera acquisition could imply optionality into 1) whether to do the deal, 2) ability to negotiate on price of the transaction, 3) flexibility around its financing options, as Micron makes those decisions with a better view on whether supply and demand improvement materializes in the fourth quarter… Separately, Inotera’s CFO Peter Shen has resigned from the company to join HTC as CFO effective June 20, 2016. We do not view these events as related, but think it has increased the amount of uncertainty around the Inotera transaction.

UBS also chimed in on Micron after signaling that the Inotera deal was delayed. The firm has a Buy rating, but its target as of June 9 was just $14.00. UBS said at that time:

We think market expectations for the near term remain muted. Micron stock could react positively if any of the following scenarios occur: 1) report/guide to positive adjusted EPS, 2)break even Free Cash Flow, 3) a reduction in full year capex. Steady progress in the 3D NAND ramp and new consumer products could also offer some modest uplift to flash revenues and profits, especially if Micron sees any increased exposure to flagship smartphones where storage capacities could increase materially based on our checks.

JPMorgan issued a post-delay report on Inotera as well in early June. Their rating was Overweight at that time, but the price target was only $13.00 then. The firm has maintained an Overweight rating all the way down, even when its price targets were north of $30 and $40. The JPMorgan report said:

We still anticipate an inflection in revenue/margins in the August quarter. We believe Micron’s margins and revenue are on track to inflect positively in the August quarter, which should be positive for the stock. In additional to seasonal improvement in demand, Micron stands to benefit from further cost reductions, in part to the 20nm DRAM ramp.

Deutsche Bank issued a report in early June calling for margin stabilization and a margin rebound in the second half of 2016. The firm’s rating is Buy and its target price at the start of June was $16.00 despite a lowering of earnings estimates. Deutsche Bank’s report included the following:

We lower our estimates for Micron to reflect continued challenges in the PC market, along with newly-issued debt and earnings dilution from Inotera. That said, industry DRAM capital spending appears to be more disciplined, which should moderate supply growth in the second half of 2016. In addition, Micron appears to be executing on track with its technology roadmaps and product mix optimization, which should further drive margin improvements in the next 6-12 months. Despite the recent run, Micron’s risk-reward remains favorable at 1.1 times book (value).