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Micron Downgraded to Strong Sell: Time to Offload It?

Zacks Equity Research
Updated

On Apr 8, 2016, Zacks Investment Research downgraded Micron Technology Inc. MU to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies holding a Zacks Rank #5 are likely to underperform the broader market.

Most of the estimates for this semiconductor solution provider have been moving downward since it announced its results for the second quarter of fiscal 2016 on Mar 30, 2016.

Why the Downgrade?

The company reported adjusted loss per share (excluding the impact of one-time items) of 5 cents in the second-quarter as against year-ago adjusted earnings of 81 cents per share.

Adding to the woes, Micron’s revenues in the quarter decreased 29.6% on a year-over-year basis to $2.93 billion and lagged the Zacks Consensus Estimate of $3.27 billion. The year-year-over decline was primarily due to softness in the PC DRAM segment.  Also, pricing pressure in client SSD and certain eMCP segments hurt results.

Going further, Micron provided a not-so-encouraging outlook for third quarter of fiscal 2016. Micron expects revenues in the range of $2.8 billion to $3.1 billion for third quarter of fiscal 2016. The Zacks Consensus Estimate is pegged at $2.955 billion. The company expects loss per share in the range of 5 cents to 12 cents. The Zacks Consensus Estimate is pegged at a loss of 9 cents.

A dull outlook for the third quarter and a dismal overall trend resulted in downward estimate revisions for Micron. Over the last 60 days, 8 out of 10 estimates were revised downward for fiscal 2016. None of the estimates moved up. The Zacks Consensus Estimate moved down by 22 cents to 21 cents per share over the same time frame.

Moreover, the stock looks very unattractive from a valuation perspective. This is because Micron currently trades at a forward P/E of 49.39x as against the industry group average of 48.20x, which signifies a huge downward potential.

It is worth mentioning that management blamed the sluggish demand for personal computers (PCs) and lower Dynamic Random Access Memory (DRAM) selling prices for the disappointing performance. DRAM products accounted for 54% of total revenue during the quarter. DRAM average selling price (ASP) and sales volume declined 10% each on a sequential basis.
DRAMs are memory chips used in PCs.

Further, Western Digital Corporation WDC, which is in the process of buying out SanDisk Corporation SNDK, a key player in the NAND space, could increase the competition in the industry.

A better-ranked stock in the broader technology sector is Lexmark International Inc. LXK, sporting a Zacks Rank #1 (Strong Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
WESTERN DIGITAL (WDC): Free Stock Analysis Report
 
LEXMARK INTL (LXK): Free Stock Analysis Report
 
SANDISK CORP (SNDK): Free Stock Analysis Report
 
MICRON TECH (MU): Free Stock Analysis Report
 
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Zacks Investment Research