Nomura Initiates Micron At Neutral, Sees Positives And Negatives To The Stock

Micron Technology, Inc. MU is back on track in 2019 after a rough 2018, but one Wall Street analyst says investors can expect more mixed performance from Micron shares ahead.

The Analyst

Nomura Instinet analyst David Wong initiated coverage of Micron with a Neutral rating and $45 price target.

The Thesis

Wong said in a note there are several positives to investing in Micron at this point:

• Micron’s profitability profile has improved dramatically, hitting record gross margins of between 50 and 60 percent in recent years.
• Competition in the memory market has consolidated to just three primary players: Micron, Hynix and Samsung Electronics Co Ltd SSNLF.
• When the memory market recovery takes hold, Micron should be able to maintain an earnings multiple in the high single-digits or low double-digits.
• However, Micron is still facing too many headwinds for Wong to recommend the stock:
• The global DRAM and NAND markets are still in a cyclical downturn, with January and February sales dropping 28 percent and 33 percent, respectively.
• While competition has consolidated, Samsung has much more financial resources than Micron to improve its technology.
• Memory manufacturing is a capital-intensive business, with Micron’s capex as a percent of revenue peaking at above 40 percent in recent years.

As a result, Wong applied an earnings multiple of just 10 to his fiscal 2021 EPS estimate to arrive at his $45 price target.

“This multiple represents a PEG ratio of about 1, reflecting Micron’s moderate growth potential applied to an earnings estimate that represents a normal period of profitability (between peak and trough),” he wrote.

Price Action

Micron's stock traded higher by 1.3 percent to $42.36 per share Tuesday morning.

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