Micron: Still Trying to Overcome Bad Economics

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Warren Buffett once said: “When a management with a reputation for brilliance tackles a business with a reputation for poor economics, it is the reputation of the business that remains intact.”

In a recent article, we discussed the dismal outlook of memory chip giant Micron (NASDAQ: MU), a company that has had to deal with quite a bit of back luck – including the horrific Thailand flood of last year. It seems each step forward has been followed by two steps back, which (as we indicated) does not make it a good stock to hold.

Although management has been doing a respectable job making the best out of a bad situation, the poor economics of the memory business are proving too much to overcome. While Micron remains steadfast in trying to restore its operation, unfortunately, first quarter earnings suggest that things just may be getting worse.

The Quarter That Was

For the period ending Nov. 29, Micron posted revenue of $1.8 billion, or 14% lower year-over-year and missing analysts’ estimates of $2.01 billion. The company also posted a wider loss of 27 cents per share versus Street estimates of 20 cents. But from there, it went further downhill.

Revenue from NAND products shed 4% sequentially. The company said that this was due to a 9% drop in volume, which was to a degree offset by a 5% increase in average selling prices (ASP). Likewise, the DRAM segment didn’t perform much better, posting a 9% sequential drop. DRAMs were also impacted by an 11% drop in ASPs.

If there was any good news, it was that NOR Flash products arrived flat when compared to Q4, albeit not a huge endorsement. But relative to other segments, investors should gladly take it. However, gross margins did show some signs of life, coming in at 12%, one full point better sequentially.  But margin improvements have proved inconsequential – at least where it matters most, the bottom line.

Also, poor PC shipments have caused companies such as Dell (NASDAQ: DELL) and Hewlett-Packard (NYSE: HPQ) to accumulate more memory chips than they need. This has cause the entire industry to start reducing orders, further hurting Micron. What’s more, it does not help that analysts are beginning to slash Microsoft (NASDAQ: MSFT) Windows 8 estimates due to poor sales.

One of the bullish arguments for Micron over the past couple of quarters have been how well received Windows 8 was expected to be. Investors wanted desperately to believe that the new OS would spur more PC buying, giving life to Micron customers, Dell and HP. It has not worked.

Microsoft issues aside, since then HP has had its own set of problems with a recent $8 billion write-down for Autonomy, while Dell has been trying to become the next IBM. It does not help that IBM left the PC business altogether.

Moving Forward

All of this now makes Micron’s recent acquisition of Elpida for $2.37 billion appear ill-timed. Although investors sought to look on the bright side upon the announcement, there is now the inevitable manufacturing slowdown with which Micron must deal.

This is, of course, if the company cares about restoring profitability after six consecutive quarters of losses. It has no choice. On the positive side, Micron has not given up. During the quarter, the company said it invested $538 million in capital expenditures, bringing its cash and investments to a total of $2.8 billion. So there remains hope.

Bottom Line

The good news is that Micron’s disappointing quarter was "not really news." While it does appear that 2013 will be even worse in terms of manufacturing and PC shipments, investors were bracing for the results. The stock didn’t react much to the downside, which suggests that the results were priced in.

Nonetheless, at $6.79 per share, there are much better places for investors to put their money. The bad economics of the memory business will continue to hurt Micron, unless of course tablets and smartphones start adopting DRAM in large volumes. I just don’t envision that ever happening.


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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