Goldman: Micron Is A Sell As DRAM Margin Risk Materializes & FCF Weakens

In a report issued Friday, Goldman Sachs analyst Mark Delaney and his team reiterated a Sell rating on shares of Micron Technology, Inc. MU, while trimming their price target from $19 to $17 on the back of materializing DRAM margin risk and free cash flow (FCF) weakness ahead.

The Event

On Thursday, Micron reported weaker-than-expected guidance and results for its fiscal third quarter. Revenue of $3.853 billion (down 8 percent quarter-over-quarter) fell 1 percent below both the firm’s and the Street’s consensus, while operating earnings of $0.54 per share slightly surprised experts at Goldman – but not the Street.

Related Link: Micron Technology Misses Q3 Views

The analysts estimate DRAM sales fell 12 percent quarter-over-quarter, while NAND sales rose only 4 percent (versus Goldman’s estimate of 6 percent).

Guidance was also week. Management said it expects fourth quarter sales of $3.450 billion to $3.7 billion (down 4 percent to 10 billion quarter-over-quarter).

Implications

On lower sales and margins, the firm trimmed its EPS estimates for 2015, 2016 and 2017, to $2.74, $1.70 and $1.80, respectively (down from $2.89, $2.35 and $2.30), and reiterated a Sell rating on the back of the two aforementioned factors.

“On DRAM margins, near-term pressure from higher mobile DRAM mix and ASP declines is materializing,” the report explains. In addition, the analysts think “there could be further headwinds as the DDR4  DRAM ASP premium in servers compresses in 2HCY15, and from potential oversupply in 1HCY16 from higher output (driven by 20 nm transitions and new factory ramps) plus slower seasonal demand.”

On FCF, the experts think fiscal 2016 FCF will stand around $1.00 (versus their EPS estimate of $1.70) as Micron’s depreciation is low (partly due to M&A) and they anticipated a capex surge as the company trails industry leaders on technology in both DRAM and in NAND.

The firm is modeling fiscal 2016 capex of $4.4 billion, up from roughly $3.8 billion in fiscal 2015. However, the estimate might be conservative, given the management’s current guidance.