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Micron Technology - Earnings Report and Investing Thesis (MU)

Posted on | June 26, 2009 Time: 12:45 pm |

This post is a follow up on my earlier promise to provide a thesis for adding a small Micron position to the Secular Trends Portfolio. With Fiscal Q3 earnings out today as well, I’ll also prep for that and give a modest report after hearing the conference call.

Many readers have been wondering, quite bluntly, “Why the hell to you like this POS company that hasn’t made a dime in 11 straight quarters?!”

Well, I can’t argue with those comments; Micron has been a corporate failure in almost any investing metric for the past two years. As to why, take your pick:

failure1) Massive oversupply of DRAM thanks to commoditzation, and what essentially amounts to subsidies from certain Asian governments (yeah, I’m talking to you Taiwan!)

2) Weakening global PC demand, The Great Recession, etc…

3) dovetailing from #1, the entry into the market from every Tom, Dick, and Harry (or whatever those name equivalents are in Asia) because memory chips are the easiest to copy and spit out (Intel learned this lesson over a decade ago).

But yes, I do have an investing thesis here. I’m not supremely confident that Micron is the prime beneficiary of it, as I don’t have a PhD in Techie and don’t care to begin training for it now. (Read my earlier post on NVDA to hear why I don’t think this really makes for a smart tech investor anyway, or view the performance of my Technology allocation versus industry benchmarks here).

There are several promising developments in the wastelands that have been commodity tech hardware:

1) Micron is a partner with Intel, not a competitor (this is so important for a weakened tech company like Micron that if there was a #0 on this list, it would go there)

2) Several smaller players (Qimonda AG & Spansion Inc) have already declared bankruptcy, helping to thin out some of the herd. In addition, major S. Korean competitors Samsung and Hynix have announced major production cuts, as has Micron. Is it enough to meet with the demand level of the much-hyped “new normal”? I don’t know yet, because we’re not there yet.

3) Micron recently completed a $450 equity & convertible notes offering - a major accomplishment a this time, in this particular market. MU now sits on over $950 million in cash with minimal debt coming due in the next 12 months (about $350m). Granted, MU may need all this cash just to wait out the storm, but they at least have some breathing room. Samsung and Hynix, meanwhile are adding to their debt and may need to conduct offerings of their own in the near future (this is coming from their creditors, not the companies - that’s never a good sign).

4) Micron was able to unload the worst of their 3 divisions, the CMOS images sensors company (Aptima Imaging Corp.), to a private equity group earlier this month. MU retains a 35% share and production credits, but they dumped a real dog here. I don’t think the division ever earned a taxable dime. It’s someone else’s capital issue now; Micron is just running the plants. A good move, so long as you don’t care about turning a profit, which investors shouldn’t at this point.

5) DRAM and NAND flash pricing has improved measurably in the past few months. Now here is where I get into tricky territory, because I frankly can’t keep up with the technology cycles here. And more importantly, I don’t want to get into prolonged aruments with others over how this product performs better on this custom system or that, etc. There are dozens of sites and blogs devoted to just that - I know because I read several of them. Not a one has ever provided me with an actionable investing idea. That said, I’m always willing to learn more, so feel free to comment on my overall thesis but please, please, keep it all in context.

windows76) Industry catalysts - From all that I hear, the release of Windows 7 may finally do what Vista could have done if it didn’t happen to be a complete abomination. A successful launch of “7″ would force PC users around the world to upgrade their RAM en masse. I don’t know the exact specs, but I’m sure the new Windows will be a RAM hog. In addition, a new release of Windows Server should help Micron in the same way on the server end (servers are 20% of Micron’s business and rising).

This should spur OEMs to invest in some inventory building as we head into the all-important Fall buying period.

Also, there is increasing interest in 3G smartphones, digital movie cameras, and portable computing/storage/game/music devices of all sorts. The secular trends here are strong and growing. That’s what we like at Epiphany Investing.

Solid-state devices seem to be the future of memory, and Micron should be able to carve out a space for itself and possibly establish a new pricing trend. DRAM has been an utter disaster, but there’s only two ways the future can go. Either all flash memory products become a government-subsidized version of packing peanuts, or they become an innovative tech product again.

I’m making a small bet on the latter.

Earnings Report was after yesterday’s close; I’ll report after reading through the CCall…

Ryan Barnes

disclosure: Author does not hold positions in the companies mentioned; MU and NVDA are holdings in the Secular Trends Model Portfolio

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