Why Micron is a Sell Ahead of Earnings

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nothing ever comes easy in the commodity memory business. Although it’s a highly volatile industry, the sector's erratic behavior is considered normal. But this makes it an extremely complicated group to forecast. One of the biggest names in the bunch is Micron Technology (NASDAQ: MU), a stock that I have always wanted to like, but just can’t because (you guessed it) it’s too inconsistent.

Although Micron has shown "flashes" of brilliance from time to time, it has often been followed by some disappointment. In fairness, the company has had little to no control over some of its bad luck. The Thailand flood of last year serves as a perfect example. On the other hand, in the areas that it can control, the company has disappointed investors relative to expectations. Will things change this time?

Expectations for the quarter

With the stock trading at $6.82 ahead of its first-quarter fiscal 2013 earnings report on Thursday, investors want to know how to play the news. But that's not the question to be asking. Rather, can Micron prove it's anything but a sell? I don't think it can. Here's why.

For the quarter, analysts are expecting the company to report a loss of 19 cents per share, which would come in flat and matching its performance for 2011. But this would be enough to log a 30% improvement sequentially from the wider than expected 24-cent loss produced in the fourth quarter.

The dismal performance was attributable to poor average selling prices (ASP) per unit and macro uncertainty. Investors will want to see a much better improvement to start the new fiscal calendar. However, analysts don’t appear too optimistic. Over the past 90 days, consensus estimates have dropped from a loss of 5 cents.

For the fiscal year, analysts are projecting a loss of 26 cents per share. Likewise, revenue estimates have been on the decline. For the quarter, analysts are expecting sales of $2.01 billion, which is almost 4% lower year-over-year. For the full year, revenue is expected to come in at $8.62 billion.

How well Micron performs remains to be seen. But that the company has averaged revenue declines of over 6% year-over-year during the past four quarters does not inspire much confidence. So will a revenue miss be viewed as a surprise? Not hardly. And it's more of possibility than not.

Moving forward

Remarkably, despite such an abysmal track record, over 80% of analysts have a buy rating on the stock. I disagree. I’ve just provided all of the evidence needed for why the stock should be avoided. For that matter, Micron has never been a good buy-and-hold equity while its volatility has been ideal from traders.

Still, analysts wish to look on the bright side and point to a possible recovery in memory demand. Microsoft (NASDAQ: MSFT) is often regarded as a possible catalyst. The potential success of Windows 8 is expected to provide a boost to the PC market to the extent that it will increase demand for DRAM. However, some of Micron’s biggest customers such as Hewlett-Packard and Dell have not exactly been “tearing it up” in the PC business.

Equally disappointing has been the lackluster sales that Microsoft has reported not only for its Surface tablet but also for Windows 8. Nonetheless, we’ve heard these same spiels over the past several quarters as to how the memory market was on the rebound. But it never comes.

However, each time the recovery is said to be “one quarter away.” At this point, I worry that investors are betting on “a good name” in a business with poor economics. The latter seems just too much for Micron to overcome. Warren Buffett would appreciate this.

Bottom Line

Investors have to realize that to take a position at these levels would be akin to making a bet that the memory business is in full recovery mode. I have not seen sufficient evidence to say this. Likewise, do investors really want to subject themselves to this sort of volatility? I think Intel and SanDisk present much better value. I would not want to be a holder of Micron as the company might offer another disappointment. But then again, as noted in my opening, this would be normal.

rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services recommend Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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