CEO Joel Kocher was saying things Wall Street loves to hear.
marketing maestro told analysts and money managers Micron Electronics was engineering a turnaround that would
focus the No. 3 PC direct seller on the midsize business market and away from its recently sold-off contract manufacturing business.
Wall Street listened and sent the Boise, Idaho-based company's stock to around 25 in early November from 15 a month earlier. But now Micron Electronics has lost its shine. The stock has retreated to 12 3/16 after the company said March 1 it wouldn't meet earnings expectations for its second fiscal quarter ended Feb. 26. Analysts quickly slashed their earnings estimates for the quarter to 7 cents a share, short of the
first quarter's 12 cents a share. In its year-ago second quarter, the company posted a loss of 25 cents a share, according to
. (Micron Electronics will report second-quarter earnings after the close Monday.)
"Six months ago it really seemed like Micron had turned the corner in what it was saying to the Street," says an institutional fund manager who requested anonymity. The manager, who says he got out of Micron at 16 this January, grimaces when he thinks of how long it took him to realize the stock had lost favor. "All the dominoes seemed to be falling in the wrong direction," he says now with sigh.
What ails this offshoot of chipmaker
is competition and a Rodney Dangerfield complex. "Micron is a third-tier player with a second-tier brand name," says Randy Hanley, an analyst with the institutional money management firm
Duncan-Hurst Capital Management
, which has no position in the stock.
Micron Electronics blames
January ad blitz for Pentium III for pushing corporations and consumers to hold off on purchases until the chip was launched in March. "Since our quarter ended at the end of February, the hype created a hole in our quarter," complains Steve Laney, Micron's vice president of investor relations. Presumably, the end of the quarter was the culprit: Other PC makers, including
, are also showing signs of a corporate demand
'Micron is a third-tier player with a second-tier brand name.'
-- Duncan-Hurst's Randy Hanley.
The one piece of good news is that the company's corporate business is beginning to show signs of recovery. Laney says Micron Electronics is now looking for "north of 20%" sequential growth in its small and medium-sized business unit, which accounted for 25% of revenue in the first quarter. In the second quarter, the unit is expected to record $120 million in sales, up from $100 million last quarter. And the government business unit -- the company's biggest revenue source, contributing 34% of revenue in the first quarter -- last Wednesday won a two-year
contract that could be worth as much as $400 million.
So what is the problem? For one, direct-selling rivals Dell and
will also get to bid along with Micron Electronics in the not quite iron-clad Air Force contract. The
, which runs the Air Force, will award jobs to the lowest bidder. And Micron Electronics cannot win a war of attrition with its bigger rivals, says Stuart Peterson, the technology analyst for the
, a hedge fund with $550 million in assets.
"Micron just hasn't been able to get any traction from the perspective of the everyday user," says Peterson, whose firm has no position in the stock. And Peterson says Micron's previous quarters were propped up by one-time events that inflated earnings.
For example, Peterson is curious that the company's receivables and what it reserves for accounts that may not be paid off, such as outdated inventory, are moving in opposite directions. Peterson notes that while Micron's receivables (the money owed to Micron by partners) jumped to $10 million in the fourth quarter, doubtful accounts declined to $3.7 million from $5.2 million. "That's a red flag in my book," he says. "This helped that quarter's earnings by at least a penny." Micron's Laney retorts that those figures suggest nothing out of the ordinary.
Subsequent slip-ups have hurt the company more. The strong fourth quarter, in which Micron Electronics earned 8 cents a share, beating estimates by 6 cents, ended a year in which the company recorded an 11% drop in revenue. This fiscal year was expected to be better.
But in the first quarter, revenue dropped 28% from a year ago. And now Micron says it won't beat even reduced revenue targets for the second quarter.
CEO Kocher said he doesn't expect Micron Electronics to show another year-over-year revenue increase until the fourth quarter, which ends in August.
Money managers, it seems, have too many concerns right now with the PC seller and the industry to like Micron Electronics. "I think Micron can still make it as a company, but it isn't a leader, and in an industry slowdown, Micron will get hurt the most," says Duncan-Hurst's Hanley. Concludes Peterson: "It has too much hair on it for our tastes."