|
Published: June 29, 2010
Don’t let the stock action fool you. Just
because shares of Micron Technology (NYSE: MU) are off
more than -10% in Tuesday trading, the company’s Monday night
earnings release should give a cheer to the entire tech sector
-- that is, when investors are ready to once again embrace this
highly
cyclical industry. Right now, the whole technology group is
getting no love from investors for fear that global economic
pressures will kill the party before it really gets underway.
But the party has already started, if you look at the tech
results we saw in the spring. Micron’s fiscal third-quarter
results simply underscore the industry momentum that is already
underway.
For example, Micron’s sales doubled from the year-ago quarter,
and a $246 million operating loss back then has morphed into a
$540 million gain in the most recent quarter. Gross margins rose
from 9.7% a year ago to 37.1% this time around. (Analysts
expected gross margins to be only 35% -- not because selling
prices were higher than they expected, but because cost control
was especially impressive). Micron’s memory chip segments (both
DRAM and flash) are even more volatile than the rest of the tech
sector, but many other names in the group are also posting much
stronger results this year.
Trouble is, investors are focusing on what tech results look
like in a bad year. And Micron surely operates in the toughest
segment of tech. The company lost loads of money in each of the
last three years. (Then again, it made loads of money in the
prior five years). So investors are not yet ready to embrace the
current operating momentum.
For investors, the real question is whether the good times can
last. Short answer: a qualified yes. Future results are unlikely
to show the dramatic increases we’re seeing now, but we should
see yet higher sales and profits in 2011 and beyond -- assuming
the global economy can keep from slipping into recession. As we
noted in this piece, European economic woes are keeping many on
edge.
Why should profits and margins rise from here? Micron is
starting to benefit from a transition to the most advanced kind
of memory chip, known as DDR3. Those chips carry far higher
margins than the DDR2 chips that dominated the sales mix in the
just-finished quarter. And in the coming quarters, Micron will
start to see the benefits of a recently-acquired company called
Numonyx, which is the largest supplier of flash memory to smart
phones and other handheld devices. Demand in this area is quite
strong, and should boost Micron’s profits into next year, even
if the core memory businesses stay flat or grow only modestly.
"Micron now has the
capacity to gain
market share in
memory with the
combination of
DRAM+NOR and NAND
offering which could
point to stabilizing
gross margins with a
solid technology
lead," noted
analysts at Sterne
Agee.
Although Fiscal
(August) 2010 profit
forecasts are
unlikely to move
much on these
results, look for
the fiscal 2011
consensus
EPS estimate to
rise from a current
$1.60 to around
$2.20 to $2.40 a
share. Shares trade
for just four times
the mid-range of
that forecast.
Action to Take
-->
Shares are down
Tuesday in large
part because they
rose by a
commensurate amount
on Monday. Investors
were clearly
expecting even more
robust results or
white-hot forward
guidance. The
risk/reward, though,
looks quite good.
Tangible
book value
stands at $7.32, and
should rise to
around $9 over the
next four quarters
as
cash flow adds
cash to the
balance sheet.
So further weakness
appears unlikely.
And as we look to
upside, shares have
historically traded
at around six times
peak cycle profits.
Even if EPS rises to
just $2 next year,
below the level
being bandied about
by several analysts
this morning, shares
still can rise up to
$12, or about +30%
from current levels.
Investors may be
taking profits on
Micron and many
other tech names
right now, but
further strong
results coming into
the July
earnings season
could give the
sector a fresh lift.
-- David Sterman
Staff Writer
StreetAuthority |
