RBC Capital Upgrades Micron but misses the boat by 7 weeks

Posted: May 20, 2014 by mattmargolis24 in Micron Technology
Tags: , , ,

by Matt Margolis

Yesterday RBC Capital upgraded Micron to Outperform and raised its price target from $27 to $34.  I want to thank them joining the upgrade party but they are 7+ weeks late.  In my April 1, 2014 post I gave Micron a $61 – 12 month target and my target was driven by the Supply and Demand of the Memory Industry.

If anyone follows the share price of Micron Technology (MU) I’m sure your first thought might be, “this stock already doubled and almost tripled over the last 12 months.”  The answer is yes the Micron has gone from $9.23 on April 1, 2013 to $23.66  as of today’s close on March 31, 2014 (a whopping increase of 2.56x or 156% over the last 12 months).    I’m going to argue that the supply and demand situation along with the macro economic environment driving the memory industry will drive Micron’s share price up another 156% over the next 12 months.  I am officially initiating coverage on Micron and issuing a $61 – 12 month price target.

 

RBC Capital cites tight industry supply and improved margins behind its Micron’s upgrade:

 “On the DRAM side, higher margin levels are likely sustainable given mix-shift movements,upcoming 20nm cost-downs, fundamental industry shifts in participants, and tight industry supply (low channel inventories).”

 

The positive nature of the memory industry could result in Micron evaluating a cash return strategy for shareholders in the coming years.”

 

Our view remains that the memory industry is benefiting from the law of diminishing cost savings, which is expected to result in a multi-year cycle of higher revenues and operating margins in both DRAM and NAND.

If RBC Capital had listened to Micron’s conference call or read the transcript they would have upgraded the shares about 7 weeks ago.  Micron made this comment during the April conference call (courtesy of Seeking Alpha)  regarding the memory industry.

Our outlook for memory industry conditions remains favorable. We believe the current industry structure is fundamentally changed and we can now manage our business focused on return based capital and supply decisions which was not always possible in the past.

Final Thoughts

Subtle points and comments from management go largely unnoticed, in this case Micron tipped its hand during the April conference call that memory industry conditions remain favorable and the industry has “fundamentally changed” from the past. Micron does not typically give out analyst handouts regarding EPS or revenue estimates, but Micron’s comment was one of the most bullish comments you could hear from a significant memory industry player.

If you waited for yesterday’s upgrade of Micron technology you already missed a 17% return from my initial coverage of the stock at $23.66.   I have an average cost basis in Micron of under $10, but I have been monitoring the memory industry and I was waiting to see if any new supply would come online in 2014 to disrupt the current memory industry.  Today’s memory industry favors suppliers, which will only continue to increase margins and bottom line earnings per share for Micron for the next 6 to 12 months.  As with any investment, you need to closely monitor the marketplace and see the train coming before anyone can hear it.

Full Disclosure I am long MU and I have joined PTT Research.  My premium Forensics Newsletter is scheduled to launch on June 2nd.  The premium paid service option will grant my paid subscribers exclusive content weeks before my analysis is published on Seeking Alpha, the Obscure Analyst blog or any other website.  Another advantage of PTT is the subscriber Forum that allows sharing of ideas and analyst Q&A.

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Comments
  1. Barry Fitzgerald says:

    But you won’t be obscure anymore 😦

    Like

  2. Loren says:

    Matt, many thanks for your in depth research on GTAT, as I have a good percentage of my portfolio invested there now. I haven’t considered MU previously, but since I have a hunk in SNDK, I am thinking of spreading half of that to MU. I’m wondering if you have any thoughts comparing MU and SNDK? Thanks in advance, if you have the time.

    Like

    • I think Micron is a better play on smartphones, tablets and wearables while SanDisk owns the solid state drives. Micron is trying to make traction in this space. I do believe the wave of growth coming for bit demand of memory will be from tablets, mobile and we wearables. Micron isn’t at $50 because people don’t respect the story. They used to lose money when times were tough and make a lot when times were good. The bad times won’t be coming anytime soon due to the memory industry setup.

      Like

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