$MU Q2 Earnings Preview

by Dan March 30, 2016 12:02 pm • Commentary• Trade Ideas

Event: Micron (MU) reports fiscal Q2 results tonight after the close. The options market is implying about a 10% one day post earnings move which is rich to the 4 qtr average move of about 7.5% and the 10 year average one day move of about 6.25%.  

Price Action / Technicals: MU is down 24% on the year, down 63% from its 52 week highs and down 72% from its 15 year highs made in late 2014.  Despite the massive gains off of its highs, MU is up only about 16% from its 52 week and 3 year intra-day low made in January and only up 10% from its closing low made in February, underperforming the broad market and massively underperforming the Philadelphia Semiconductor Index (SOX) which is up 23% from its February 11th low.

From a technical standpoint, the recent consolidation above $10 is mildly attractive, but given the stock’s weak relative strength maybe it’s basing for a breakdown. It’s too bad the short interest in the stock is only 5.5% and that the analyst community is not more in-line with investors that have been selling the stock with impunity for 2 years (there are currently 22 Buy ratings, 6 Holds and 3 Sells with a 12 month price target of about $15.75), or the one year chart would look like a coiled spring on the slightest bit of good news:

MU 1yr chart from Bloomberg
MU 1yr chart from Bloomberg

To drive home just how precarious this consolidation may be, looking at the 5 year chart, one can see an air-pocket below the recent lows, this pig could easily be $5 or $15 in 2016:

MU 5 year chart from Bloomberg
MU 5 year chart from Bloomberg

As for Wall Street Analyst ratings, Needham Semi Analyst Raj Gill, downgraded the stock yesterday, per Barron’s:

Gill writes that the Street numbers are too high for Q2, given weakness in personal computers continues to pressure average selling price, and there is a potential problem with NAND pricing as well.

“We continue to see a weak PC market adversely affecting DRAM pricing, and checks pointing to vulnerabilities in mobile DRAM,” writes Gill. “We believe a similar dynamic could be developing in NAND.”

In contrast to consensus for the quarter of $3.047 billion in revenue and for a 9-cent loss per share, Gill is modeling $3.025 billion and an 8-cent loss, down from his prior projection for $3.05 billion and a 7-cent loss. Micron forecast $2.9 billion to $3.2 billion, and a 5- to 12-cent loss.

Street consensus for sales to rise 11.5% in the August, 2017 fiscal year, moreover, are unrealistic, he thinks:

Net, we believe the Street’s revenue ests calling for 12% Y/Y sales growth in FY17 after a 19% Y/Y decline in FY16 are overly optimistic, along with price targets of $10+. Moreover, with our revised ASP and unit projections, we forecast MU will incur a negative $1.2B and $0.6B of FCF in FY16 and FY17, even after factoring in the Inotera acquisition. We now forecast ~30% and ~14% ASP declines in DRAM in FY16 and FY17 respectively, and ~13% ASP declines in NAND each of the next two years. Our bit growth assumptions have also declined. Looking to FY17, even with ~20% bit growth and a slowing decline in ASPs, we believe margins will remain in the low to mid-20% range.

Estimates and Forecasts from Bloomberg:

  • 2Q adj loss/shr est. 9c (loss/shr range 3c-15c); co. forecast adj loss/shr 5c-12c (Dec. 22)
    2Q rev. est. $3.05b (range $2.96b-$3.13b), co. forecast $2.9b-$3.2b (Dec. 22)
    2Q gross margin est. 18.4% (range 17%-19%), co. forecast 17.5%-20% (Dec. 22)
  • 3Q adj. EPS est. 3c
    3Q rev. est. $3.18b
    3Q gross margin est. 20.5%