Many were shocked to hear FQ3 guidelines issued by Micron (MU) management and saw (positive) the post-trading share price last Wednesday. The two events were not very well matched, as forecasts for the third quarter of the fiscal year were below analyst expectations.
|Sales||4.8 $ B||5.29 billion||-9.3%  EPS||$ 0.85||$ 1.20||-29%|
Recovery in second half not yet completed
Some commentators in several news and articles from Seeking Alpha repeatedly mentioned the claim of "low visibility" management. However, this low visibility does not mean that the company has no idea what its customers are doing or planning. Given the fact that large storage orders are pre-negotiated, and even before this point is discussed in customer conversations about their needs, it is not difficult to consider the visibility of Micron in at least three months.
Well, what exactly does management expect for three months? In the prepared comments, CEO Sanjay Mehrotra gave the following color:
… As we discussed at our last earnings call, we still expect DRAM bit deliveries to increase in our fifth quarter, with demand growth in The second half of the calendar will increase in 2019 as most customer holdings are expected to normalize by the middle of the year.
Following the call, an analyst questioned how management's confidence persisted in the second half of the year, and in particular the FQ3 pickup of DRAM broadcasts, and the management responded:
When DRAM consumption of our customer in the end markets, especially in the cloud market, are still healthy. It's just that these customers use up their inventory to meet this demand. And over the next few months, by the middle of this year, inventory will largely normalize again, providing opportunities for greater demand in the second half compared to the first half of the year
Given this downturn due to increased customer inventories, there would be a return normalization by the middle of the year means a return to the same customer's demand – and that's exactly what management expects.
Even if the concerns of the trade persist Until the spring, customers still have to pull on their still high inventories. Once these stocks are normalized – as Mehrotra put it – the train is resumed by semiconductor companies.
What about stocks and wafers idle?
The second part of Micron's initiatives continues with higher inventories and idle time 5% of DRAM and NAND wafer launches were confused. Analysts were puzzled over how they should link expectations for the second half of reducing losses. However, if you step back for a moment, you realize that this makes sense.
Because inventory inventories are typical for industry downturns and the fact that this time only three major players are left, it's not incomprehensible to see 150 days of inventory expected. Of course, this is the highest value ever in a downturn, but a year ago, many bears argued that the oligopoly means little and will make no difference. Instead, this proves that the oligopoly would rather keep stocks and then sell at low prices to gain market share. Why would any of the three major powers (19459023) now decide so far into the process of screwing the market where they work hard to keep the ground from falling? It is not a logical premise for a bear theory.
But how do you reconcile the 5% idling of wafers? If Micron anticipated a recovery for the second half of the year, it should certainly rise and be prepared to sell everything for the upturn to return to sequential revenue and earnings growth. Stop again and think about where the industry today was compared to two or three years ago. With only three players in the downturn, this is a never-before-seen situation. That is, Micron will play a role in creating this second half of the year .
If supply was not mitigated along with expectations of demand (with the goal of a balanced supply / demand) then the recovery would not stay on track and be pushed further out. Perhaps this would not even be the case, as the increase in demand in the second half of the year would be met by an offer aimed at a demand forecast six months ago. This would continue an imbalance in the supply and demand structure, leading to an imbalance that only resolves a much higher demand.
Marry the narrative with guidance
The reason why the market has not been punished (a decline of 2% since profits do not fit the definition of punished) Micron relies mainly on the numbers, which is the relative strength of the apparent show deepest downturn. The FQ3 guideline was what the earlier cycle tips were best at. Margins, sales and net income are still above or at previous highs.
But how do we know that this is the low point, apart from the management that tells us that a better year is coming? The market looks at the rounding of the soil. the signal the worst expectations are behind the business.
(Source: Micron's Yield Reports, FQ3 Guidelines and the FQ4 Estimate of the Author)
The chart above shows the earnings growth of the last three Quarters plus guidance for the current quarter and my estimate of $ 0.60 for the FQ4 EPS. Notice how the slowdown in earnings has shifted in the last quarter, and the rounding of the bottom was generated by the guidance. Despite a sequential decline in FQ4 earnings, the growth rate is back to 0% to regain growth.
The chart above shows the correlation between the low of the last cycle in 2016 and the increase in 2017. The turn in FQ2 2016 and FQ3 2016 is the same point that we will see now in the second half of Micron's fiscal year , It is obvious that the market describes the rounding of the low point in terms of the quarterly quarterly slowdown and acceleration of growth.
For this reason, the company can make a downward forecast and still react well to the market expectation of a slowdown in negative growth. It is therefore not incomprehensible that the market can see the expectations for a better second half of the year, the idling of the wafers and the slowdown in negative yields, as Micron marks the bottom and goes up.
Overall, the Company Aligned The recovery in the second half of the year is not just a narrative, it is not inventory adjustments, supply reduced and investment costs adjusted to expected demand. The company talks and talks. The market not only looks at this, but also looks at a rounding up of the low point. Even if a lower FQ4 is expected, earnings growth slows and begins to spin. I would be a buyer at these levels and hold on until the end of the year.
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Disclosure: I am / we are a long MU. I wrote this article myself, and it expresses my own opinions. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose inventory is mentioned in this article.