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Micron's (MU) - Get Micron Technology, Inc. Report near-term focus should be erasing the memories of investors who are focused on the glut in memory chips.

The company is one of the world's leading DRAM and flash memory producers for consumer electronics, a former high-growth area that has experienced a weak pricing environment in recent quarters.

Micron posted its fiscal second-quarter results April 4, losing 7 cents a share in the period, which fell well short of analyst expectations for a 3-cent gain. Revenue also fell 7% quarter over quarter to $1.43 billion.

Even though the company cut production costs 15% for NAND flash and 25% for DRAM chips sequentially, flash prices fell 30% and DRAM prices dropped 15% over the same period. As a result, Micron's overall gross margin still fell 6 percentage points quarter over quarter during the period.

The lion's share of the company's sales came from DRAM chips for personal computers, which have been falling in price.



, which has had its own problems in recent months, also cut back on orders for image sensors that are used in cameras for its cell phones.

As a result, Micron shares are down 19.6% year to date, closing Tuesday at $11.22. With that in mind, I'm here to answer the question: Should I do it? Can Micron find a bottom in the near term, or will investors have a better buying opportunity later?

Micron is expected to earn just 3 cents a share in fiscal 2007, which ends in August, and 47 cents in fiscal 2008, so the company isn't a bargain on a P/E basis. That said, the company trades at just 1.1 times tangible book value, which is at the low end of its historical range. Book value is equal to total common shareholder's equity, which is found on the balance sheet and often helps put a price floor on a stock.

A real battleground has formed in the analyst community around the stock, as Micron received both an upgrade from Robert Baird prior to the quarterly report and a downgrade from

Goldman Sachs

after the numbers came out. According to Bloomberg, 11 of 22 analysts currently rate the stock a buy, compared with nine holds and two sells.

No one seems to be arguing that Micron's last quarter was strong, but the bulls are calling for a near-term bottom and rebound for prices in the company's commodity chip markets. The market is supposed to be a forward discounting mechanism, so why is the stock falling if a bottom in DRAM prices seems so apparent to some folks?

In a word, inventory.

Micron's inventory grew $179 million, or 16% sequentially, to $1.29 billion. It's never a good sign when inventory is growing faster than sales, but it is especially troubling because the company reportedly had a full quarter's worth of finished image sensors in stock. According to analyst Doug Freedman of American Technology Research, the division accounts for 25% of Micron's profit.

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With that in mind, I believe Micron is a stock that readers should continue to avoid. While upside potential may outweigh downside over the course of the next 12 to 18 months, I just don't believe that demand visibility is strong enough in the company's commodity chip markets to call a bottom.

The stock will likely challenge its book value in the coming months, which would take Micron down into the single digits for the first time since 2005. At that point, shares would deserve another look from potential buyers.

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David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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