Analysts Applaud Micron's Beat-And-Raise Third Quarter

Micron Technology, Inc. MU announced last week its fiscal third-quarter results, which showed 92-percent year-over-year revenue growth to $5.57 billion and non-GAAP earnings per share of $1.62 compared to $0.90 in the year-ago period.

The results were ahead of the consensus estimates. On an even more positive note, the company issued upbeat guidance for the fourth quarter.

Reasonable Upside To $40

Commenting on the results, Pacific Crest Securities said Micron is improving its technology and benefiting from strong memory pricing, which in turn is supporting high margins and earnings per share.

Analysts Weston Twigg and Daniel Baksht said they are raising their estimates meaningfully, predicated on the fourth-quarter guidance and the likelihood of high margins moving forward.

They see further upside, if the Toshiba Corp (USA) TOSYY–Western Digital Cor WDC dispute results in NAND supply constraints.

Although the analysts see reasonable upside to $40, they remain Sector Weight, given their expectations that memory prices would soften later this year and Micron's position behind Samsung Electronic SSNLF in DRAM technology.

Bullish Thesis Intact

Deutsche Bank attributed the third-quarter upside in gross margin, revenues and earnings per share to the 14-percent sequential increase in DRAM ASP. The firm noted that demand was strong, driven by cloud customers and accelerated SSD adoption.

Analysts Sidney Ho and Ross Seymore noted the company's commentary of healthy supply-demand scenario persisting through 2018, with the impact of a slightly faster-than-expected DRAM supply offset by robust demand from servers and mobile.

Deutsche Bank, however, believes the implied ASP for the fiscal fourth quarter to be conservative.

"We continue to be impressed with the co's execution on its technology roadmap, a key to gaining further confidence from investors, in our view," the firm said.

"With memory suppliers exhibiting disciplined capex behaviors, we believe favorable market conditions will continue."

Will Unreasonably Low Multiples Expand?

Following the solid beat-and-raise quarter, with the August quarter annualized earnings per share of over $7 being double that of the previous cycle in 2014, when Micron went to $35, Cowen questioned whether the unreasonably low multiples expand, as fundamentals are significantly improved.

Analysts Timothy Arcuri, Karl Ackerman and Vivian Zhang believe an expansion in multiples would drive sustainable cash flows through 2019. Despite the guidance suggesting peaking of gross margins, the analysts said they recommend the stock not because gross margins get much better from here but due to their strong conviction that fundamentals should be more sustainable.

Cowen sees a bright outlook for Micron due to the ongoing challenges to the transition of 1x for Samsung and Hynix, Micron being cost-competitive in NAND for the first time ever and expanding content growth across server and mobile.

"Net, there seems to be a clear path here to low $40s/share even still assuming a healthy discount to the market and peers," the firm said.

Strong Revenue And Gross Margin Momentum

Wells Fargo analyst David Wong said the strong May quarter results point to strong revenue and gross margin momentum. The analyst is of the view the company is benefiting from a favorable memory pricing environment, firm memory bit demand and lower costs from its technology transitions.

The analyst raised his 2017 GAAP earnings per share estimate from $3.63 to $4 and 2018 estimate from $5 to $5.50.

Sun, Moon And Stars Remain Aligned For Micron

Loop Capital Markets analyst Betsy Van Hees believes Micron is benefiting from the elongated trifecta of the memory cycle — tight supply/demand dynamics, increasing prices and cost reductions.

"We expect these favorable dynamics to continue to drive operating leverage in the model with sustained healthy earnings and revenue growth through the second half of calendar year 2017 and into fiscal year 2018," the firm said.

The firm said it continues to recommend investors with a higher risk/reward tolerance take advantage of the recent pullback and buy the stock.

Rating/Price Target

• Pacific Crest Securities: Sector Weight.
• Deutsche Bank: Reiterated Buy rating/lifted price target from $35 to $37.
• Cowen: Maintains at Outperform/raised price target from $38 to $40.
• Wells Fargo: Maintains at Outperform/$40.
• Loop Capital Markets: Reiterated Buy rating/$40.

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Micron At Highest Level Since January 2015

Micron May Be Facing Its Biggest Opportunity For Fundamental Improvement ______ Image Credit: By Andrzej Barabasz (Chepry) (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons