Report: Market catalysts boosting Micron stock

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 8/3/2007

Financial research and services firm American Technology Research analyst Doug Freedman reiterated his “Buy” rating on Micron Technology Inc.’s stock today thanks to a strong set up for the second half of the year.

Freedman said in a report that the firm believes DRAM and NAND inventories remain low with channel inventories improving since Micron reported its fiscal Q3 financial results on June 28.

“We expect DRAM prices to continue to firm in August as inventories are low following an above-seasonal PC market in Q2 and strong back-to-school build. NAND remains in tight supply due to Samsung/Hynix yield problems and strong bit consumption drivers. We believe the NAND market may loosen a bit in Q4 as yield problems improve and bit growth resumes (Toshiba/SanDisk continue to ramp at full capacity with strong yields). However, we view IM Flash Technologies as being in a competitive cost position with NAND and expect bit growth to outpace the industry for at least the next 12 months (50 percent quarter-over-quarter),” he wrote.

Also, the firm says recent job cuts will help move Micron’s cost structure in-line with the industry sooner than expected. 

“The recent cuts and announcement consideration to outsource certain back-end processes will likely help push its costs down closer to the industry average. We note that we have not incorporated the recently reported job cuts into our numbers at present as we await management to publicly address the cuts in more detail. However, we believe the cuts are significant and could potentially add approximately 10 cents to 2008 earnings per share (EPS) while near-term earnings are likely saddled with large one-time severance charges,” Freedman said.

Further, AmTech reminded that, as it has said in the past, Micron could divest its image sensor business, and at the same time reduce its capacity for DRAM and eliminate the need to convert 200-mm fabs to 300-mm fabs. 

“We believe Micron's image sensor segment (approximately 11 percent of revenue), which was a source of cash in 2006, has been a drain on results of late as the company has lost share at key customers. We believe management is considering divesting this segment, and a formal announcement of a sale would likely serve as a catalyst for the stock with cash being used to fund capex, working capital, and debt reduction,” he wrote.

“Micron is the share leader in sensors, though share is likely eroding due to design losses at key OEMs (including Nokia). However, we believe there are multiple drivers of sensor volumes that make the business attractive to an outside bidder. First, we note that handset volumes will surpass original expectations this year and likely reach 1.17 billion units, or up about 18 percent year-over-year. Second, chip-scale packaging and other advances in sensor technology will push total sensor package costs down and increase the total available market. As a result, image sensors can now address the growth area of handsets: low cost emerging markets,” Freedman continued.

“Admittedly, a comparison to OmniVision, which is fabless, is not apples to apples, but we do believe it helps give an understanding of what Micron's sensor business could be worth. We note that despite being fabless, we estimate OmniVision carries a higher gross margin than Micron's sensor segment at this point. Below are our assumptions for Micron’s sensor business and valuation scenarios based on OmniVision,” he added.

Finally, bit growth projections are likely to be cut for the second half of the year as 200-mm fabs are taken off line, which is both positive and negative. On the good side, with less supply, average selling prices (ASPs) will firm, however, on the bad side, the ASP bounce-back is not expected to make 200-mm production profitable, and ASP recovery could be limited, the firm concluded.