Cowen and Company lowers its price target on Micron (Nasdaq: MU) from $30 down to $28 and affirms its Outperform rating following the company's Analyst Day late last week.

Analyst Timothy Arcuri noted the following key points:

Financial

In guiding F2016 capex to $5.5B (mid-pt) - a number well above Street ~$4.2B models but spot in-line w/our model and preview - the company positioned this as an abnormally high number due to two key factors: 1) ~$700MM for Fab 10x shell (we thought upwards of $1B) and 2) ~$800MM related to 3D XPoint (a number which the company suggests is being funded by "partners" e.g. INTC). The Street will have to raise capex - crimping F2016 FCF - but we were already modeling $5.7B capex for F2016 in the context of a ~400MM negative FCF number. Given the partner funding will be additive to MU's own capex contribution of ~$4.8B, MU's FCF should still approach $500MM. On a CY basis, we think MU will generate over ~$900MM FCF as the 20nm crossover in 1H:16 fuels material cost improvements. Overall, MU is suggesting that a "normalized" number is more in the low $4B's but gave little indication when capex would come back down to this level. Relative to near-term margin headwinds, the Inotera agreement (market minus w/the discount partially based on Inotera EBITDA) is now zeroed out as a NT headwind and MU maintains the view that once the new agreement takes effect 1/1/16, this becomes a few 100bps
tailwind.

Supply/Demand

Industry: No change to 2015 bit supply growth of ~25% for DRAM and high 30's for NAND. Forward industry commentary remained constructive on a combination of structural supply constraints (we agree in DRAM, we are not so sure in NAND as 3D reeks of an over-shoot especially given the massive increases in bits/wafer when scaling to 48L and beyond) and, we think, a more candid desire from Samsung to maintain memory profits now that mobile has completely imploded. Longer-term, MU expect very similar numbers for C2016 with DRAM structurally limited and NAND limted by ROIC considerations.

MU: While it expects to grow DRAM bits ~25% (mid-pt) CAGR from F2015-F2017, further drill-down suggests this now looks more likely F2017-loaded than F2016, meaning MU may not outgrow the market in '16 as previously expected. Similarly in NAND, it expects to grow mid 30%s CAGR over this time - not out of line w/the market despite what appears to be a very aggressive 3D NAND ramp (consistent w/our checks and prior commentary).

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