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Why Micron Can Emerge From the Coronavirus Wreckage

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Micron's  (MU) - Get Micron Technology, Inc. Report China exposure and limited inventory position are two reasons the near-term pain may be close to bottoming. 

Here are all the factors to consider near-term and long-term. 

First off, the stock is down roughly 39% to $36 a share from its 2020 high of $59.99, while the iShares PHLX Semiconductor ETF  (SOXX) - Get iShares PHLX SOX Semiconductor Sector Index Fund Report is down 32% from its 2020 high. 

Micron's earnings per share is expected to come in at $1.88 on a GAAP basis for all of 2020, down hugely from its 2010 result of $5.51, according to FactSet consensus estimates. EPS for the next 12 months is expected to contract roughly 49%, with estimates falling from their prior levels by roughly the same amount the stock has fallen. 

The question for the near-term is how much worse things can get. 

Susquehanna Financial analyst Mehdi Hosseini wrote in a note that, while he is bringing his EPS forecast for 2020 down by about 16%, he thinks the damage for the year could be limited. Plus, he values Micron based on an optimistic long-term profit forecast. 

"Micron's exposure to China, along with lean inventories among all memory manufacturers, are two factors that could actually provide a cushion as China recovers from the coronavirus, all while EU and North America have yet to see a peaking in new cases," Hosseini said. 

Indeed, Micron sees roughly 15% of its revenue from China and 42% from the greater Asia continent, where the virus is abating. That enables Micron to manufacture enough to meet demand and enjoy a return to consumer end-market demand. 

Hosseini added that "China/Greater Asia could actually help MU with rather stable quarterly earnings in the following two quarters (of $0.50-$0.60), though this also pushes out the step-up (to EPS of $1.00+). All in all, we expect a weaker demand environment, particularly in second-half calendar year 2020, which we have tried to embed in our updated estimates." 

Importantly, other memory chip makers may be in the same boat as Micron. Western Digital  (WDC) - Get Western Digital Corporation Report sees 23% of revenue from China and 54% from Asian at large and the stock is down 55% from its 2020 high. 

Also, as Hosseini did point out, U.S. demand may continue to fall, as the virus isn't going anywhere any time soon. With Apple (which has shut down all non-China stores) a large customer for Micron, Micron sees more than 20% of sales come from the U.S. 

Hosseini did note, as most analysts will, that Micron shares are range bound at best and in down mode at worst through its upcoming earnings report Wednesday. With little visibility on the virus, management is unlikely to guide with any enthusiasm or accuracy for the year, which will pressure any buying activity of the stock. 

"We don't expect the stock to start regaining what it has recently lost until the May-June time frame when we should learn more about the magnitude of the demand destruction," Hosseini said. 

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