Micron: Exploring Memory Lane

 | Dec 03, 2013 | 1:30 PM EST
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As 2013 winds down, I decided to take a look at some of this year's big winners. Will these stocks continue their run or will hedge fund mangers dump them into year-end in a desperate attempt to lock in some gains?

According to Goldman Sachs (GS), as of October 31, the average hedge fund is up just 6% vs. the S&P 500 Index, which is up 25.3%. If any of those under performers were late to the Micron story, I would expect some profit taking into the New Year.

Micron Technology (MU) has been a big winner. Year-to-date, Micron is up 220% and just a few cents from its 52-week high. The tech momentum hounds love to play this stock. And the company is great at playing the game. Micron management is well-traveled. Management will make 14 presentations this year to investors all over the world. Institutional investors love these conferences because it gives them a chance to rub shoulders with the company's top brass and to talk shop. When a company has a good story to tell, management hits the road more often than Bon Jovi.

There are a couple of factors that have driven Micron's stock. First, DRAM prices are up. DRAM prices jumped to a two-year high because of a fire at an SK Hynix fab in Wuxi, China. SK Hynix is the world's second largest maker of DRAM. Officials expected the plant to begin operations by the end of November, but as of now there is no word when the plant will restart. Even if the plant is restarted in the next few weeks, DRAM prices are expected to remain high throughout the first quarter.

According to DRAMeXchange, Asia's largest chip market, before the fire, a 2Gig DDR DRAM cost $1.60 on the spot market. At the end of November, the chips were trading hands at $2.34, a 46% jump. Before the fire, Micron was trading at $13 a share. After the fire, the stock rose 40%.

Second, Micron's manufacturing costs are expected to fall in the low single digits, helping to boost margins. Third, the company recently completed the purchase of Elpida Memory. By purchasing Elpida, Micron is trying to consolidate the industry and prevent overproduction from sending DRAM prices lower. Elpida added $355 million to Micron's revenue, but more importantly, the acquisition added about 42% more DRAMs to sell.

With more chips to sell at higher prices, bullish investors are expecting the increased revenues to flow through Micron's income statement. While the favorable conditions will last through the first quarter of next year, eventually the fab damaged in the fire will come back online.

There's a reason spot prices were at $1.60 in September. The industry was awash in chips in September. Because of the fire, chip buyers were forced to buy chips on the spot market and that drove up prices. The excess worldwide DRAM inventory was sopped up.

It's important to note that since Micron has long-term supply agreements with its vendors, the company will only realize a 5% price increase, regardless of what happens on the spot market. Don't confuse the spot market with the contract market. Rookies expecting Micron to make a killing because chip prices are up 46% are in for a rude awakening.

Because it has more chips to sell at a slightly higher average selling price and it will spend the year cutting expenses at Elpida, Micron will do well in 2014. But it's not going to be enough to drive the stock much higher.

In my opinion, savvy chip investors will take profits before the end of the month.

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