Can Micron Hold On to Its Momentum?


Shares of memory maker Micron have been on a tear. Upon reaching $10.27 last week, the stock has essentially doubled after bottoming out at $5.16 on Oct. 24. With the stock now only percentage points away from a 52-week high, investors want assurances that Micron has enough ammo to support the recent optimism. I don't blame them.

Micron is known for its volatility. And it certainly doesn't help that the commodity memory industry, which has posted weak margins due to low average selling prices, or ASPs, has been shaky at best. But with names like SanDisk , Samsung and Applied Materials, there's also been a lot of value in this sector. And Micron certainly fits in that category. So, heading into the company's earnings results, there was a lot to prove. And Micron delivered.

Who and what is Micron today?
Unlike previous reports, Micron's second-quarter results left very little for investors to complain about. Revenue arrived at $2.1 billion, up 3% year over year. While not exactly a strong number, when compared to the first-quarter results, it represents a 13% sequential jump. Plus it was enough to beat Street estimates of $1.92 billion.

The company's flash memory business consists of NOR and NAND, non-volatile storage technologies that requires no power to retain data. Both work the same way, but are different in functionality. NAND, which is used in devices like MP3 players, is able to retain more storage, whereas NOR, which is used in mobile phones, is faster. Micron arguably perfected this market. But there have been plenty of struggles.

Not only has Micron lost market share to SanDisk and Samsung, but the declining PC industry and soft ASPs left investors no choice but to bail on the stock. So, the Street rejoiced that the strong performance was largely due to its flagship chips, NAND and DRAM (dynamic random access memory, the type often found in personal computers).

Is this the same management team?
Though I've followed this company for several years, I can't say that I recognize this management team anymore, which is a good thing. The deficits that once aggravated investors are slowly being addressed. For instance, in the quarter, DRAM revenue surged 24% sequentially due to a 38% increase in sales volume. This is despite a 10% drop in ASPs.

Ordinarily, the soft ASP situation, while not new, would be cause for concern. But the Street didn't expect much price movement. Plus, it seems that Micron focused more this quarter on moving PC-related DRAM, which has much lower margin. In other words, this is where the higher sales volume, while typically good, might have actually hurt.

Impressively, however, NAND revenue shot up 8%, which was offset by continued struggles in the NOR segment, which fell 14% year over year. Management, however, made up for this weakness in profitability. Gross margin arrived at 18%, a 6% improvement sequentially and 5% better year over year. This resulted to a 76% sequential improvement in operating loss, which arrived at $23 million.

Ordinarily, investors would take issue with a company like Micron that still operating at a loss. But signs of improvement are everywhere. The Street loved the improved inventory position, which Micron was able to reduce by $360 million year over year. This, along with the growing margins, indicates that profitability could be just around the corner. While management has been beaten up in the past, today, the team deserves credit for a solid second-quarter performance.

You've got our attention, now what?
For this momentum to continue, Micron can't let its foot off the throttle. Management has done a great job diversifying the memory business, but it needs to continue. To that end, the completed acquisition for bankrupt chip maker Elpida should help. This should position Micron for stronger growth in other end markets, such as servers and mobile devices.

Plus, Elpida should help propel Micron to the second-largest player in the DRAM market. Micron will be ahead of names like Hynix, a South Korean chip maker, but will remain behind Samsung. But the good news, though, is that Elpida will help Micron build leverage with Apple.

Needless to say, Apple would have an interest in helping Micron improve its memory business against Samsung. In the meantime, with new device launches from Appleand Samsung spurring the growth in mobile, Micron's NAND business should grow commensurately. But that can also be said about SanDisk, and other names like RF Micro Devices and (of course) Qualcomm.

What of the stock?
With continued margin and cash flow improvements, as well as better diversification, there's still a lot of value here. However, the negative earnings stand out like a sore thumb. That said, based on fiscal 2014 estimates, which is when the company is expected turn profitable, these shares are only trading at 14 times forward earnings, which is not too demanding in this sector.

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