Why Most Analysts Are Still Backing Micron After Earnings

With an instant recession due to the COVID-19 pandemic, it’s a wonder than any company can offer decent earnings and try to make guidance forecasts. Micron Technology Inc. (NASDAQ: MU) has managed to trade up after earnings, but the big question about guidance being more or less in-line with expectations is what happens if the current bad consumer and business climate keeps deteriorating. Micron had traded down about 1.8% ahead of earnings on Wednesday, and the post-earnings and in-line guidance reaction had shares up over 3.5% at $44.00 Thursday morning.

24/7 Wall St. has reviewed close to a dozen analyst calls in the wake of the DRAM and NAND leader’s report. The tone is generally positive, but many target cuts are simply trying to deal with lowered expectations in the new recessionary climate.

We have first covered the calls in which more information was available, and the rest of the calls that had been seen are covered afterward.

BofA Securities raised Micron to Buy from Underperform and hiked its price objective up to $60 from $50. That report’s investment rationale said its Buy rating is based on these issues:

(1) low P/B (close to the previous trough at near 1x),
(2) margin improvement (May-end quarter) vs a more serious COVID-19 outbreak (Europe, US),
(3) well managed chip production (no disruption) using new tech (1xnm/1ynm DRAM, 128-layer NAND),
(4) solid financials (net cash) and active shareholder returns using free cash flow (buyback).

Credit Suisse reiterated its Outperform rating, and it still has that super-high $90 target price. Its report noted significant decreases in Chinese consumer, handset and auto demand being partially offset by stronger data center demand. Also noted was that notebook demand is increasing and Chinese manufacturers are increasingly returning to full production, while there is a gradual recovery in China smartphone demand. The firm also noted that Micron’s high-value NAND production facilities in Malaysia were affected by a governmental shutdown. It also said:

Importantly, long-term industry DRAM/NAND demand trajectories were unchanged at mid-to-high teen and 30% range CAGRs, respectively, as Micron expects economic improvement later in 2HCY20 and further rebound in momentum into calendar year 2021.

Wedbush Securities maintained its Outperform rating and a $51 target price, noting that favorable pricing is meeting uncertainty around demand. The Wedbush report noted capital spending and average selling prices (ASPs):

DRAM and NAND pricing continued to trend more favorably with ASPs flat Q/Q for DRAM and up high single digits for NAND. … Micron indicated future capex would depend upon economic conditions (v.s. prior hints FY-21 spend would move higher) and also suggested industry adds could be affected by COVID-19.

CFRA maintained a Hold rating on Micron and adjusted its target to $53 from $57. The lower target is based on a price-to-earnings ratio of 10.6 times its 2021 earnings per share view, and the firm did trim its 2020 and 2021 earnings estimates. The CFRA report said:

While we are encouraged by demand/pricing trends, we think this may be partly attributable to customer inventory builds related to fears of supply shortages from COVID-19. We think data center demand remains healthy while consumer/smartphone/autos have the greatest downside. We like gross margin improvement, on favorable pricing but also note a benefit from the previously cited NAND depreciable life change. We positively view net cash of $2.7 billion (cash of $8.1 billion) and total liquidity of $10.6 billion.

Other analyst calls were seen as follows:

  • Citigroup maintained its Sell rating on Micron and lowered its target price to $35 from $38.
  • Deutsche Bank maintained its Buy rating but trimmed its target price to $60 from $65.
  • Mizuho maintained its Buy rating but trimmed its target price to $60 from $65.
  • Raymond James maintained it as Strong Buy but cut its target price to $60 from $70.
  • Needham maintained its Buy rating but trimmed its target to $63 from $70.
  • Wells Fargo maintained its Overweight rating and actually raised its target to $55 from $50.

The Micron stock 52-week trading range was $31.13 to $61.19, and the consensus target price was $64.46.