Micron Earnings Preview -- Buy the Stock, Ignore the Noise

 

NEW YORK (TheStreet) -- Memory-chip maker Micron  (MU) will report earnings results Thursday after the closing bell. And investors who have waited for their chance to buy a cheap company with long-term potential shouldn't delay anymore, given how cheap Micron stock has become. 

The Boise, Idaho-based company, which manufactures flash-memory and non-volatile storage chips known as DRAM and NAND, has made tons of money for its shareholders, posting a stock gain of some 300% over the past three years compared with a gain of 57% for the S&P 500  (SPX) index. But the Micron story has changed.

Revenue and earnings have been hard to come by in recent quarters. And the market has punished Micron for it, sending the stock down some 30% on the year, lagging the broader averages. But it's not time to press the panic button. Expectations are low. And to the extent Micron can deliver on the analysts' reduced estimates, these shares can be revived.

For the fiscal third quarter that ended in May, earnings are projected to have declined 24% from a year earlier to 60 cents a share, while revenue is expected to have fallen 1% to $3.93 billion. For the full year ending in August, the average estimate is for a year-over-year decline of 5% to $3.07 a share, and a 3% increase in revenue to $16.89 billion.

Why are these projections so low? Although the growing popularity of mobile devices -- built with solid-state drives (SSD) -- makes them a strong revenue driver for Micron, its DRAM (dynamic random-access memory) business, which accounts for roughly 30% of its total revenue, has been under pressure.

As the world's second-largest DRAM vendor, Micron's revenue and profits have slowed due to the continued decline in personal-computer sales. And things are not expected to improve quickly. Consensus estimates suggest an 11% year-over-year decline in PC DRAM demand for 2016, after a weak 2015. And this explains the recent struggles for Micron stock, which has lost almost 20% of its value in the past year.

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