Why Micron’s Earnings Were Not Good Enough

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Micron Technology Inc. (NASDAQ: MU) reported its third-quarter earnings after markets closed Monday night, and the semiconductor maker beat consensus estimates for both earnings per share (EPS) and revenues. The company posted adjusted earnings per share (EPS) of $0.79 on revenue of $3.98 billion, compared with a consensus estimate $0.70 per share on $3.89 billion in revenue.

Here was the problem: On a sequential basis, revenue slipped 3%. Adjusted earnings of $913 million equaled a sequential decline of almost 7.7% from $989 million ($0.85 per share). A year-over-year comparison does not include revenues and earnings from Elpida Memory, which Micron acquired out of bankruptcy last year. That deal did not close until the third quarter, so the only reasonable comparison for analysts and investors to make was against the company’s second quarter. That makes the comparison look bad.

What continues to be good news for Micron is its relationship with Apple Inc. (NASDAQ: AAPL). Its acquisition of Elpida gives Micron a seat at the table of suppliers for the iPhone, including the upcoming iPhone 6. It is always better to have a seat at that table than to be outside the dining room looking in.

Analysts have been raising ratings on Micron to or reiterating them at Buy with price targets from $38 to $50 a share. A recent upgrade from Intel Corp. (NASDAQ: INTC) on its own outlook for the coming quarter has added to expectations for increased shipments of DRAM for the new PCs the Intel is forecasting.

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The question investors are asking now is whether Micron’s share-price run-up is in the rear-view mirror? Since posting a five-year low under $5 a share in October 2011, Micron’s stock price is up more than 600%. Since closing the deal for Elpida, shares are up 150%. As the economist Herbert Stein once noted, “If something can’t go on forever, it won’t.”

The end of Micron’s run may be here now or it may be months or more into the future. That is a timing question and requires a crystal ball to discern the answer. Micron’s business, however, remains solid, and at a forward P/E ratio of just 9.5 it likely remains a good investment. It is not likely to rise another 150% by July 2015 however.

Shares traded down about 0.6% in premarket trading Tuesday, at $31.44 in a 52-week trading range of $12.31 to $32.43. The consensus price target on the stock was around $35.30 before the results were announced.

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