Drexel Hamilton Shows Concern On DRAM Pricing, Downgrades Micron To Sell

In a report published Tuesday, Drexel Hamilton downgraded shares of Micron Technology, Inc. (NASDAQ: MU) to Sell from Hold with a price target lowered to $20 from a previous $30, as process-driven DRAM price declines are likely to "continue and probably deepen."

According to Whittington, declines in DRAM pricing will translate to a lower margin environment, which will still be profitable but "materially less so" than once believed. The analyst continued that PC DRAM price weakness has now spread to mobile, reducing margins and earnings estimates as Samsung brings process cost drops to its customers.

Whittington noted that Micron is nearly a process node back, its 20nm conversion which is slated for early 2016, is liable to see sharp margin drops in mainstay DRAM. Rather than a soft May quarter (and followed by progressive gains) the analyst now sees the likelihood of a further sequential earnings per share decline in August's fourth quarter.

The analyst is now modelling Micron's DRAM margin to be 35.0 percent in the third quarter, marking a downward revision of 200 basis points from his prior estimate and 440 basis points sequentially. In addition, rather than a flat fourth quarter gross margin trajectory, the analyst is now expecting a further 400 basis point quarter-quarter drop to 31.0 percent.

Whittington is now projecting the company to earn $2.87 per share in the full year fiscal 2015 versus a prior estimate of $3.17 per share. He also lowered his full year fiscal 2016 earnings per share estimate to $2.00 from a previous estimate of $3.32.