Why Wedbush Downgraded Micron: Upside Might Not Come Until 2016

In a report published Monday, Wedbush analyst Betsy Van Hees downgraded the rating on Micron Technology, Inc. MU from Outperform to Neutral, while reducing the price target from $26 to $19, saying that DRAM supply/demand was unlikely to improve and cost downs were unlikely to outpace ASP declines until mid-2016. Analyst Betsy Van Hees said that industry checks indicated that 1H Aug DRAM contract negotiations had not been completed, while suggesting that DDR3 4GB SO-DIMM could decline to $20. In case this happened, the company would record a sequential QTD price decline of 18 percent for FQ4. Although there were speculations of Samsung moving 30 percent of PC DRAM capacity to mobile DRAM, there was no evidence of this. Spot prices for 4Gb DDR3 had declined by about 24 percent QTD, with PC DRAM supply and ASP pressure high. Van Hees commented, "We also now believe the benefits MU will see in FQ1 from PC refresh (Win 10), client SSDs, and seasonal uplift in mobile handsets (i.e., iPhone 6s) will be more muted due to the uncertain macro, F/X headwinds, and tough competitive landscape." While Micron seemed to be "laying the right ground work" with CapEx spend oriented towards long-term success, the company's shares were likely to "continue to struggle" until there were signs of the DRAM industry supply/demand environment stabilizing. The EPS estimates for FY15 and FY16 have been reduced from $2.75 to $2.66 and from $2.67 to $1.90, respectively, to reflect uncertain demand and increased ASP pressure. The pro forma EPS estimate for 2016 has been reduced from $2.84 to $2.12.