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Micron Technology (MU) Closes Buyout of Inotera Memories

Zacks Equity Research

Semiconductor solution provider Micron Technology Inc. MU recently announced that it has completed the acquisition of the remaining stake in Taiwan’s Inotera Memories Inc. for approximately $4 billion. Micron had signed an agreement in Dec 2015 to acquire the remaining 67% stake in Inotera. With this, Micron now has 100% ownership of the aforesaid entity. The move is believed to be immediately accretive to Micron’s DRAM gross margin, earnings per share and free cash flow.

About Inotera

Taiwan-based Inotera was formed in 2003 as a joint venture between Nanya Technology Corporation and Infineon. The company provides DRAM memory foundry services, especially on 300-mm silicon wafers.

In Feb 2015, Micron revised its DRAM supply agreement with Inotera. As per the deal, it was agreed that Micron would purchase Inotera’s DRAM output at a discount to the market price. In 2009, Micron bought Infineon’s share in Inotera.

In fiscal 2014, Micron purchased approximately $2.68 billion of DRAM products from Inotera, which accounted for nearly 38% of its total DRAM gigabit production. With such a massive exposure to a single supplier, we believe that the recent deal will positively impact the memory chipmaker’s profit margins, earnings per share and free cash flow, going forward.

Benefits

It seems that the semiconductor industry is going through a massive consolidation phase as merger & acquisition activities are on the rise. According to the latest report by Semiconductor Industry Association (SIA), the worldwide semiconductor industry recorded sales growth of 11.5% and reached $88.3 billion in the third quarter of 2016. This marks the industry’s highest-ever quarterly sales. The industry is experiencing growth primarily due to developing end markets and new product offerings, supported by process and yield improvements by semiconductor manufacturers.

Continued strong adoption of tablets and smartphones, automotive electronics and the emergence of the new category of wearable devices have led to stronger demand for the processing and sensing devices that run them. These factors are likely to drive the semiconductor industry this year.

Additionally, Micron believes that the acquisition will also have some operational benefits, leading to efficient management of investment levels and cadence and alignment with global manufacturing operations.

Hence we believe that the current acquisition deal should translate to stronger results at Micron.

Price Movement

Micron has outperformed the Zacks categorized Semi-Conductor Memory industry over the last six months. Share price of Micron gained 51.5% compared with the industry’s gain of 47.9%.



The primary reason for the share appreciation is the company’s better-than-expected fourth-quarter fiscal 2016 results, released on Oct 4, 2016. Adjusted loss per share (excluding the impact of one-time items) of 5 cents was narrower than the Zacks Consensus Estimate of a loss of 10 cents.

Though Micron’s revenues in the quarter decreased 10.6% on a year-over-year basis to $3.217 billion, it surpassed the Zacks Consensus Estimate of $3.110 billion. Also, reported revenues increased on a quarter-over-quarter basis (up 11%), primarily due to pricing improvement in the DRAM memory chip market and recovery in the PC market.

The memory chip provided an updated guidance for the first quarter of fiscal 2017 at the Credit Suisse Technology Conference.

Micron now expects its first quarter results to meet or come above the higher-end of the previously announced guidance range. The optimistic guidance is driven by improvements in average selling prices (ASP), particularly for DRAM. Apart from this, the company also revealed that overall demand continues to be healthy while it forecasts slowing industry supply growth for the next few quarters.

Micron now anticipates revenues for the first quarter to be approximately $3.978 billion (plus/minus $50 million), which is much above its previous guidance range of $3.55 billion to $3.85 billion. The company’s new revenue guidance is also way ahead of the Zacks Consensus Estimate of $3.73 billion.

Earnings are now projected to be about 28 cents per share (plus/minus a few cents) compared with its earlier guidance range of 13 – 21 cents. The Zacks Consensus Estimate is currently pegged at earnings of 19 cents.

Our Take

Micron offers both DRAM and NAND products. DRAM chips are a key component in PCs, while NAND flash chips are critical for portable electronic devices. The improving prices for DRAM and NAND chips make us optimistic about the company’s near-term performance.

Micron is positive about the product launches and growing demand, particularly that of SSD products. The company has been constantly innovating in memory technologies, spanning DRAM, NAND and NOR Flash memory solutions, which are being widely used in the latest mobile computing devices as well as in consumer, networking and embedded products.

However, after acquiring SanDisk, Western Digital Corp. WDC has become a key player in the NAND space, which could increase competition in the industry.

Micron currently carries a Zacks Rank #2 (Buy).

A couple of other stocks worth considering in the broader technology sector are Cirrus Logic Inc. CRUS and Seagate Technology PLC STX, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cirrus and Seagate have a long-term expected EPS growth rate of 17.5% and 4%, respectively.

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