Micron: Sterne Agee, Bernstein Cheer DRAM Consolidation

Shares of DRAM and NAND flash memory chip maker Micron Technology (MU) are up 4 cents, or half a percent, at $9.97 as the stock receives a couple of thumbs up this morning based on the consolidation of DRAM supply and how it is lifting prices and profit.

“If you thought NAND supply was tight, DRAM supply is tighter,” writes Vijay Rakesh of Sterne Agee, who has a Buy rating on Micron and a $12 price target.

The reduction in DRAM producers leaves Micron in a good spot, he thinks:

We believe the DRAM market is seeing a tectonic shift as the OEM supply base shrinks from 7 suppliers in 2011 to just 3 suppliers — Samsung (005930- KR), Hynix (000660-KR) and Micron — while the DRAM mix structurally shifts away from PC-DRAM. For most intents and purposes, in the DRAM spot/contract market tracked by DRAMExchange, we believe the only supplier in the market and game in PC- DRAM town is Micron. The other two major suppliers, Samsung and Hynix, have been allocating more resources toward Mobile and Servers [�] The Memory sector has been a significant employer in Taiwan and we are now seeing significant headcount reduction from the DRAM industry reallocated to other markets, which could point to a more structural and permanent change in DRAM.

Taking it a step further, Bernstein Research’s Mark Newman, who has an Outperform rating on the shares, today raised his price target to $13 from $11, writing that despite a 67% rise this year, and a 92% run since October 24th, the stock isn’t getting full credit for lower DRAM cost-per-bit that may come with its integration of Japanese memory maker Elpida Memory, which Micron is in the process of acquiring:

The Elpida acquisition is an additional upside that the Street is not giving full value for, in our view [�] Our analysis shows that, after Micron’s acquisition of Elpida, US$ cost/Gb will be down significantly due to lower depreciation. Based on the latest Yen FX rate and our estimated Elpida cash position upon transaction closing (sometime in CQ2’13), we estimate Elpida PP&E to be valued at $0.9B using purchase accounting adjustments. This is equivalent to an increase of only 10% in Micron’s overall depreciation expense in FQ4’13 vs. FQ3’13 (less than the 15% increase Micron mentioned during FQ2’13 earnings) despite the fact that Elpida adds ~45% to Micron’s total trade memory capacity. We now estimate Micron will have to pay a total of $938M in cash upon closing for 100% of Elpida equity and 24% of Rexchip from Powerchip.

Factoring in the more profitable production, Newman raised his gross profit estimate for the fiscal year ending in August of 2014 for DRAM from $2.49 billion to $2.67 billion, and raised his NAND gross profit estimate to $1.05 billion from $1.09 billion. Combined with a lower estimate for NAND profit, based on slightly lower average prices and margin, he comes up with $1.47 per share in profit in 2014, better than his prior $1.16 estimate.