Micron on Shaky Ground

Micron Technology Inc (NYSE: MU) reported its third quarter results on June 26. Revenue was up 10% to $1.5 billion, driven by higher sales of DRAM and NAND flash products and beating analyst estimates of $1.47 billion. Net loss was $236 million, or $0.30 per diluted share. This compares with net loss of $777 million, or $1.01 per diluted share, last quarter and $225 million, or $0.29 per diluted share, last year. Analysts had estimated loss of $0.28 per share. Gross margin was 3.2%, down from 8.2% last year but was a marked improvement over negative margins in the earlier quarter.

DRAM sales were driven by a 10% sequential increase in gigabit sales but offset by a 5% decrease in ASPs. NAND sales were driven by a 40% increase in gigabit sales, offset by a 20% decrease in ASPs. As the company made continuous cost reduction efforts, the cost of goods sold per gigabit went down 15% and 25% for DRAM and NAND products, respectively.

Micron has a separate division for its CMOS imaging business, and CMOS image sensor sales increased 27% sequentially to account for 11% of total sales. Clearly, this percentage needs to increase for Micron to sustain itself in the fickle NAND/DRAM market.

Micron recently completed the creation of Meiya, its DRAM joint venture with Taiwan-based Nanya. Meiya’s initial manufacturing facility is scheduled to open in early 2009 and is expected to ramp up 10,000 wafers per week.

The company has improved the supply-demand balance for DRAM, and prices are trending upward. NAND prices, however, continue to be low as there is excess supply. Micron expects to spend $2.5 billion to $3 billion on plant and equipment in fiscal year 2008 and $1.5 billion to $2 billion in fiscal year 2009.

Micron is currently trading around $6, having lost over 50% of its value over the past year. Its market cap is around $4.5 billion. Caris & Company has initiated with a Buy rating while Cowen & Company set a Neutral rating before the earnings report.

I am not comfortable enough with Micron’s business mix to recommend this stock as a Buy.