Two Very Different Analyst Views Ahead of Micron Earnings

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Micron Technology Inc. (NASDAQ: MU) may have been an incredible growth stock in 2013 and 2014, but the chipmaker is now among the worst performing S&P 500 stocks so far in 2015. With its latest earnings report due this Thursday, and with other recent developments in the company, 24/7 Wall St. wanted to review two key analyst calls with quite opposite views ahead of the DRAM leader’s earnings. Merrill Lynch has maintained a very positive view, despite slightly lower estimates, while Wells Fargo remains very cautious.

Before we get into the analyst calls, note that Micron has been making big moves in market, collaborating with Intel Corp. (NASDAQ: INTC) to produce the highest density flash memory in the world. This collaboration could prove dominant in the years ahead. After all, Intel is about as big as they get when it comes to processors and semiconductors.

Merrill Lynch retained a Buy rating on Micron, but the firm lowered its price target to $40.50 from $45.00 in the call. The Buy rating is ultimately based on the earnings outlook and shareholder return. Chip supply can remain tight, coupled with disciplined capital expenditures and new tech execution risk, while demand can be stronger, led by China original equipment manufacturers (OEMs).

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A cash dividend is assumed to start in the 2016 fiscal year, but so far management has only confirmed an active buyback. Merrill Lynch also sees cash and cash equivalents growing to roughly $10 billion by the end of 2017, versus the expected $5.475 billion for 2015.

In the report, Merrill Lynch explained its call:

We are more positive on FY16-17 earnings (EPS $4 range) due to more promising DRAM outlook (mid-30% OPM sustainable on new tech and mix improvement). Even NAND is expected to be more profitable (mid-teens OPM) driven by 16nm/TLC and 3D. That said, our new research shows weaker earnings likely in the second and third quarters of FY 15 due to lower ASP and low growth (FY15E EPS cut by 13%), and consequently we lower our PO to $40.5 from $45.0. Our revised PO, nonetheless, offers about 50% potential stock upside; we retain Buy.

The brokerage firm sees weaker earnings through the second and third quarters of the 2015 fiscal year for a few more reasons:

  • As previously mentioned, a lower average selling price (ASP) for PC DRAM/retail NAND
  • Minimal impact from new tech (25nm mobile DRAM and 16nm TLC NAND; more effective from the fourth quarter)
  • Samsung’s better position in smartphones (China customers slightly muted)
  • Limited cost cuts using new tech (lower wafer input for TLC and 20nm)

Wells Fargo has a very negative view on Micron, which effectively looks and acts like a “Sell” rating. The firm has an Underperform rating and lowered its valuation range to $20 to $25 from the prior range of $22 to $28. Risks include highly volatile pricing for DRAM and NAND flash, the need for relatively high levels of capital investment and large swings in Micron’s profitability that have occurred in the past and that the analysts think are likely to continue into the future.

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Wells Fargo took the chance to jump in on Micron:

We think that the investment community may still be overly optimistic in its projections of DRAM pricing and Micron’s gross margin potential over the next few quarters, and for this reason we remain negative on Micron’s stock with an Underperform rating. We are decreasing our FY15 EPS estimate to $2.89 from a prior $3.05. We are leaving our below-consensus FY16 EPS estimate of $2.53 unchanged though we are reducing our valuation range to $20-25 from a prior $22-28, based on approximately 8-10x our FY16 EPS estimate of $2.53.

However, there are other factors suggesting a demand and pricing risk. Recently, SanDisk Corp. (NASDAQ: SNDK) reduced its March quarter revenue guidance to roughly $1.3 billion — down 25% sequentially — compared to its prior revenue guidance range of $1.4 billion to $1.45 billion. Also, Intel revised its guidance for sales to be $12.8 billion, compared to previous guidance for sales of $13.7 billion in the March quarter. The midpoint of Intel’s guidance implies a 13% sequential decline in the upcoming quarter, driven by weaker-than-expected demand for business desktop PCs, especially in the small and medium business segment, and a continuing inventory correction for PC processors.

The highest price target for Micron from analysts is still listed all the way up at $60, implying upside of 125% from current prices. That seems hard to imagine after the recent news around flash and PC trends. Still, the consensus analyst price target is $41.47.

Shares of Micron were fractionally higher to $26.86 in Monday’s early trading, and the stock has a 52-week trading range of $21.02 to $36.59.

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