Micron Tech (MU) Falters in Q1; Analysts Expect Tough Road Ahead

Micron Technology Inc. (NYSE: MU) is trading lower today following a first quarter result that saw a miss all around led by lower DRAM revs due to a 23% drop in pricing, ahead of what management was anticipating.

MU posted an EPS of $0.15 on revs of $2.25 billion. Adjusting for gains from a Smasung royalty agreement and losses stemming from debt buybacks, EPS would have been $0.11.

Overall, the Street was looking for an EPS of $0.30 with revenues of $2.38 billion.

As said, DRAM prices dropped 23%, which led to the drop in revs, although MU reported a 5% volume increase in sales. NAND Flash products also saw a 15% decrease in prices, but that was more than offset by a 20% jump in sales volume.

Notably, Memory segment gross margin fell 1,100 basis points sequentially, from 37% in Q410 to 26% in Q111 from lower ASPs partially offset by lower manufacturing costs.

Commenting on the results:

• Deutsche Bank notes that MU generated positive results amid a poor DRAM environment. They don't see an catalyst for an improving DRAM market, but Micron should "benefit from its growing presence in Flash and specialty DRAM."
  
  Deutsche is dropping estimates on MU. They lower their Q211 estimates from an EPS of $0.15 and revs of $2.3 billion to an EPS of $0.03 and revs of $2.0 billion. They are modeling for a DRAM average selling price drop of 23% quarter-over-quarter and NAND average selling price drop of 10% quarter-over-quarter. Gross margins are expected to be 21%.
  
  FY11 estimates are lowered from an EPS of $0.63 on revs of $9.8 billion to an EPS of $0.30 with $8.4 billion in revs.
  
  Deutsche has a Hold rating on the shares, with a price target of $9.
  
  
• Wedbush views any weakness in shares today as a buying opportunity. Wedbush believes that the DRAM market is at a bottom with "Micron likely maintaining Q/Q profitability unlike prior memory downturns," and "Intel’s decision not to provide additional CapEx to IMFS is a significant positive positioning Micron with additional NAND supply to benefit from the upcoming secular drivers of tablets, smart phones and solid state drives (SSDs)."
  
  Wedbush notes that management commented that "there is strong demand for NAND largely driven by smart phones, tablets and SSDs, but continues to see weakness in the DRAM market. DRAM [Q211] guidance is for production to be up double digits and production costs to be down low teens."
  
  Looking forward, Wedbush is adjusting their estimates. They are lowering their FY11 EPS outlook from $0.91 and revs of $8.308 billion to $0.59 and $8.330 billion. For Q211, Wedbush dropped their outlook calling for an EPS of $0.15 to $0.05, though they maintained a revenue estimate of $1.841 billion.
  
  
• Wells Fargo is now projecting losses for Micron over the next two quarters. Should DRAM prices remain at current levels, then ASPs will be down by mid-twenties percent compared to Q111. "DRAM cost/bit is expected to be by a down low teen digit percent. If NAND prices remained where they have averaged so far this quarter then ASPs would be down about 10% in the February quarter. NAND cost/bit is expected to be down by a mid to high single digit percent."
  
  Wells lowers their estimates based on the results. They lowered their Q211 EPS outlook from $0.08 to ($0.12) and FY11 estimate from $0.69 to $0.02.
  
  Wells has an Outperform on the stock, with a valuation of $10 to $12.

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