In an earlier March post to this blog, I wondered if the semiconductor stocks had become the steel stocks of the 1980's and 1990's: over-owned, overvalued, with over-capacity and the prospects of underperformance for as far as the eye can see.
With Micron Technology as the poster child for this group (I would classify MU as the most speculative play in the semi sector with very low returns on capital (if at all) and a very high degree of operating leverage with little sustainable competitive advantage) Wednesday night's report will go a long way in determining if MU is worth hanging on to in client accounts, and if there is any prospect for a DRAM ramp as a result of the Vista launch.
MU is expected to report breakeven earnings per share on Wednesday night, with $1.46 bl expected in revenues (per the First call data) versus a loss of $0.04 last year, and revenues of $1.225 bl.
Not all is lost with MU as gross margin has expanded the last three quarters and at least there is the prospect for a profit this quarter. The company diversified away from DRAM into NAND flash almost two year ago, with the last few quarter's results actually being hurt a little bit by NAND flash memory price declines, while DRAM pricing was holding in pretty well. At least in the 1990's, the key to MU was to buy the stock when the DRAM spot prices rallied and in fact when flash memory prices rose above their 200 day moving average. With the collapse of the technology market starting in 2000, MU looked for ways to diversify away from DRAM and ventured into the NAND flash market, which I think in fact will serve them well in coming years, but the company is still levered to the spot/contract pricing in both volatile markets.
Earnings estimates for fiscal '07 have come down from just over $1 per share in November '05 to the current estimate of $0.37 for the current fiscal year eps estimate. The additional memory which Vista will require was expected to have a positive impact on MU by now, although it has yet to materialize, but a couple analysts expect DRAM memory prices to bottom in the May '07 quarter.
The balance sheet for MU has actually improved since semi's collapsed earlier this decade, as the company had $3.36 per share in cash sitting on the balance sheet as of the November quarter, and had generated $2.57 in 4q trailing cash from operations, which left the stock trading at just 5(x) enterprise value to 4q trailing cash from ops.
Still, the company is burning off tax-loss carry-forwards from the massive operating losses in 2001, 2002, 2003, thus the returns on invested capital of 1% - 2% are simply a matter of there being no taxes paid. (A hedge fund manager once described MU as "an airline with a fab attached", which is investment speak for an operation that destroys capital, much like the airlines do.)
The technicals (see the monthly chart above, compliments of Telechart and www.worden.com which is our technical analysis service) have actually improved on MU of late, as the stock has attracted some interest trading near trough valuations, and just over 1(x) book value, thus at these price levels (you would think) there is very little risk to the stock. In fact, the big green volume bar indicates that the stock has seen its heaviest volume ever in 2007, which may be buying in advance of a Vista upgrade cycle.
So why own the stock with all the negatives surrounding the name ? Simply because MU is a levered play on the launch of Vista and the additional memory it would require, as well as a commodity play on the NAND flash business. Although it is unlikely that we will see a repeat of the late 1990's, there is significan leverage to MU's operations when DRAM and NAND flash prices steadily rise, as in the 1990's, eps went from a loss of $0.55 per share in fiscal 1998 to a positive $2.20 per share in 2000.
We recently added to the stock prior to the Fed meeting, and are hoping it can re-take its 200 month moving around $15 - $16 per share. If the stock can break through the $15 - $16 area on good volume, and re-take that critical support levels, MU could be a significant outperformer in 2007.
Are semi stocks the steel stocks of the 1980's and 1990's ? With the rapid speed of the tech life cycle and rapid obsolescence, winners and losers are created over much shorter time horizons than the basic industries of the previous generation. Still, we won't wait forever. MU has the possibility of a brighter future and the valuation is cheap, not without qualifiers, but we'll
give it a little more time.
position in MU, SMH
No comments:
Post a Comment