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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Micron Tech

April 1st 2010 Micron Tech
NYSE Symbol: MU
Industry: DRAM chipmaker
Price as of 4/1/10: $10.17


The first quarter is over and what a quarter it was. The major averages rallied over 4% led by the Nasdaq rallying over 5%. March is typically a preannouncement month, but instead we saw more earnings revisions to the upside. In the semiconductor space Applied Materials raised guidance last week. This weeks' featured stock reported spectacular earnings on March 31st. The featured stock of the week is Micron Tech. Micron makes DRAM processors which are found in personal computers and NAND Flash chips which typically are used in such devices as digital cameras and mp3 music players. The DRAM chipmaker is a volatile cyclical memory chipmaker that is in the sweet spot of an upturn in chip demand. Micron is not a conservative investment, but growth or momentum investors looking for a stock with upside earnings potential should take a look at Micron.
Wednesday night, Micron reported a fiscal second-quarter profit of $365 million, or 39 cents a share, compared with a loss of $763 million, or 99 cents a share, for the year-earlier period. Revenue was $1.96 billion, up from $993 million last year for 24% increase. Analysts had expected Micron to report earnings of 24 cents a share, on revenue of $1.82 billion, according to a consensus survey by Thomson Reuters. The better than expected earnings were due to strength in DRAM demand, improved operating efficiencies, and better-than-seasonal end market demand. Management's commentary on its outlook was also very positive with the largest concern appearing to be Micron's ability to keep up with the current demand outlook. For this year, above-seasonal PC forecasts along with lack of new DRAM capacity should result in strong pricing throughout the year. Manufacturing cost reductions should resume this second-half while Micron's market share should grow significantly, along with licensing revenues.
All the good news has the analyst community in a good mood. Credit Suisse is raising their target to $20 from $15. They continue to view Micron as the best levered play on the semi-cycle upswing. Demand drivers included corporate upgrades, server cycle, PC global penetration, and smartphones. They note the stock is still a legitimate double from here. FBR Capital notes Micron reported second quarter results that far exceeded consensus. They note these results are another indication that the memory industry, especially DRAM, will increase capex again in 2011 as the current shortage will worsen from the first half to the second half of 2010, when seasonality kicks in. They expect other leading memory manufacturers to report and guide to healthy cash flows from operations.
ThinkEquity raised their fair value estimate to $14 a share. They note gross margins were up, DRAM pricing up 7% in a seasonally weaker quarter, and they believe earnings leverage could actually increase in the coming quarter due to limited supple and increasing PC-server builds. Also, ramping Apple iPad builds likely positions Micron for a strong NAND flash memory orders. They believe the conservative guide positions Micron for continued upside. They raise their 2010 earnings estimates to $1.40 verse $1.06 consensus. Auriga reiterate their buy rating and $13 target as estimates move higher. Even if DRAM pricing weakens, as it inevitably will, pricing could be significant within the next six months. Microns aggressive cost reduction roadmap should help drive strong cash flow. For now, risk to estimates and the stock both appeared skewed to the upside.
Micron is not a conservative investment, but growth investors looking for a stock with good momentum should take a look at Micron.