Micron Posts an Unexpected Miss

Updated since 6:04 p.m. EDT

If scrutiny from the feds and a woozy memory chip market weren't bad enough, Micron (MU - Cramer's Take - Stockpickr) today gave investors more grounds for skittishness.

In after-hours trading, the stock was down nearly 9% immediately after the company reported earnings steeply below expectations. Shares closed regular trading up 3 cents, or 0.1%, to $19.75.

"People were definitely looking for a profit and they didn't show it," says Banc of America analyst Douglas Lee. "I think they missed every revenue and EPS estimate on the Street."

After the bell, Micron reported a net loss of $24 million, or 4 cents per diluted share for the quarter ending in May, far below analysts' consensus estimate of a gain of 6 cents, according to Thomson Financial/First Call. The company recorded $771 million in sales, also below analysts' estimates of $910.9 million.

The results compare with a second-quarter loss of 5 cents and $30 million. A year ago, Micron lost 50 cents and posted a loss of $301 million.

"Demand for memory from the computer industry softened midway through Q3. We were somewhat surprised as to the extent to which demand dropped," said Michael Sadler, vice president of worldwide sales. He attributed a 50% drop in Micron's average selling prices since March to seasonal weakness in computer demand and a leveling-off of memory content per system.

The company sold 17% fewer megabits sequentially.

Micron also recorded a writedown of $26 million in semiconductor inventory. Excluding the writedown and the effects of previous writedowns of products sold in the third quarter, the company's gross margin would have been lower by an estimated $55 million.

Inventory on the balance sheet jumped 25% sequentially to $686 million, though in its conference call Micron pointed out that inventory levels were below last year's $837 million.

"The inventory's a little disconcerting," said Lee after the conference call. "The good thing is, I don't think prices are going to go down that much lower. The bad thing is, I don't think they can move up much either, or we could see a leveling out of DRAM per system." If prices rise too much, PC manufacturers won't want to add much DRAM to their computers.

"I think fundamentally Micron could be in for a long bottom," says Lee.

Over the past few weeks Micron has suffered a host of downgrades amid worries about sluggish demand for PCs, a glut of supply in memory chips and weak DRAM prices.

In its conference call today, Micron also said it currently has no ongoing discussions with ailing Korean chipmaker Hynix, which it tried unsuccessfully to buy last spring. Back then, investors had hoped Micron would buy Hynix and shut down capacity, boosting chip prices, but Hynix executives rejected the bid.

But observers still believe Hynix is unlikely to survive the year as an independent company -- an outcome that would bode well for Micron and other memory producers.

"We believe DRAM market prices and industry fundamentals will improve significantly once it becomes clear how and when Hynix self-destructs," wrote Needham analyst Dan Scovel in a research note out this morning. He expects the Hynix creditors to take control of the company at a board of directors meeting July 24, paving the way for its sale or closure.

But for the near-term, the stock is likely to remain under plenty of pressure given today's lousy earnings report. That comes on top of recent concerns about an ongoing regulatory investigation. Last week the shares of Micron lost ground on news that the company was on the list of major DRAM makers being investigated by the Justice Department, presumably related to allegations of industry price-fixing.

The stock has lost 50%, closing at $19.75 Tuesday, since hitting a year-to-date high of $39.50 on March 5.