Micron Analysts Parse The Q4 Print; Macquarie Says 'We Expect The Downturn To Be Short-Lived'

Despite Micron Technology, Inc. MU’s strong fourth-quarter earnings and execution, the overhang from trade war costs remains an active threat to the market, according to sell-side analysts.

Micron reported quarterly earnings of $3.53 per share, beating a consensus estimatesof $3.34 by 5.69 percent. This represents a 74.75-percent increase over earnings of $2.02 per share from 2017. The company reported sales of $8.44 billion, beating estimates of $8.25 billion by 2.3 percent.

The Analysts

Morgan Stanley analyst Joseph Moore maintained an Equal Weight rating on Micron and lowered the price target from $65 to $48.
Mizuho analyst Vijay Rakesh maintained a Buy rating and lowered the price target to $65.
Macquarie Research analyst Srini Pajjuri maintained an Outperform rating and $70 price target.

The Thesis

◘ Mizuho's Rakesh said Micron had a solid quarter considering tariffs and shortages. Despite Samsung Electronics Co. SSNLF’s domination in dynamic random-access memory, or DRAM, supply, Micron maintained bit growth and higher capex.

“We believe higher bit growth and capex with ‘flat water capacity year-over-year’ could be a concern for investors even as MU drives a net cash positive balance sheet, strong GMs and buybacks ahead.”

◘ Despite some minor issues, Macquarie's Pajjuri considers the DRAM picture healthy overall, as it improved significantly this quarter. “A minor inventory correction at a few customers, CPU shortages, and season weakness will impact the next one to two quarters, which we believe is sufficiently captured in our model. We expect the downturn to be short-lived and see ASP declines moderating starting in the second quarter of calendar 2019 and stabilizing further in the second half.”

◘ Morgan Stanley's Moore said Micron is executing nicely across the board, but substantial pressures on margins still remain as prices drop.

“DRAM gross margins were 71 percent in the quarter. That means that with COGS at only 29 percent of revenues, a 10 percent reduction in costs only drives 3 points of margin improvement; or putting it a different way, only offsets 3-percent price declines.”

In terms of investability, Moore considers the stock to have balanced risk and reward.

“Further erosion in supply-demand dynamics would drive us to take a more cautious view, while a tighter market, lower stock price or rationale for higher operating margins over the longer term would make us more constructive.”

Price Action

Micron shares were down 3.43 percent at $44.48 at the time of publication Friday. 

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