Shares of DRAM and NAND memory chip maker Micron Technology (MU) are up $2.94, or over 5%, at $57.53, after Instinet's Romit Shah this morning reiterated a Buy rating on the stock, and raised his price target to $100 from $55, writing that "after consolidating over the last 3-4 months," the stock is "in the early stages of another major breakout."
Shah raises his earnings estimate for Micron for the fiscal year ending in August of 2019 to $12.22 from $11.78, way above the average estimate on Wall Street of $8.92.
He offers several good things coming for the company: "We see DRAM pricing resuming an upward trend in Q2, a first-time dividend and share buyback announcement in May, continued margin expansion in NAND and increased M&A discussion as important catalysts."
But his main argument behind his price target increase is valuation :
We simply assume that MU trades back to a 3-year average multiple relative to the S&P 500 (-42% vs. -67% currently), semiconductor sector (-34% vs. -60% currently) and several comps including Applied Materials (-27% vs. -54% currently), Lam Research (-23% vs. -56% currently) and Samsung (+10% vs. -11% currently). On a blended basis, the target multiple is 10x, versus 6x currently. This implies a target of $89 on consensus FY19 EPS of $8.90 and a target of $122 on our FY19E EPS of $12.22. We have weighted these two outcomes to derive a $100 target.
Peers of Micron are trading mixed today. Lam Research (LRCX), the maker of equipment to make those chips, is down 81 cents, at $224.14, while Western Digital (WDC), a competitor in NAND flash, is up 77 cents, or 0.7%, at $100.32.
Also bullish this morning is Evercore ISI's C J Muse, who reiterates a Buy rating, and hikes his target to $80 from $60, writing that the "stock chart is scary" is "the first thing we hear from potential new investors (+500%+ over the last 2yrs)."
"But that's what happens when the DRAM industry consolidates to 3, all players act rational, memory becomes increasingly critical in the world of compute, and rising complexity limits the magnitude of new supply," writes Muse.
"So is the memory market different this time? Absolutely!"
Micron is to report earnings March 22nd, a week from Thursday.