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Analyst Derides Micron's Rehearsal for Iacocca Role

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WE STROLLED INTO our local Rite-Aid last week, some seven days before Christmas, and found greeting cards, poinsettias and other seasonal offerings already discounted by 50% or more. There were pre-holiday bargains galore, so we filled our basket to the brim.

After last week's bigger-than-expected bombshell of a loss, does that same logic hold true for Micron Technology ? The Idaho maker of dynamic-random-access-memory chips is now priced to move. Its shares last week hit a 52-week low of $9.80 on Thursday. But are they really a bargain?

Not even close, says Fred Ramberg, a principal and contributing analyst with Ramberg, Whalen & Co., a Hampton, N.H., tech-research outfit. In a sarcastic response to the Micron debacle, Ramberg offered a prize to the first of his firm's clients to call and ask if they should buy Micron right now. "The prize was a free breast augmentation, because anyone who wants to buy Micron has got to be a boob," Ramberg deadpanned.

But seriously, Ramberg explained, there are money managers and sell-side analysts who will soon enough begin touting Micron as a bona fide bargain, but they could not be more wrong.

"Nothing has fundamentally changed," Ramberg told Barron's. "So why should we not think that this has another $10 more to go down?"

Ramberg's long-term fundamental view of Micron is that it cannot become profitable without owning or controlling a consumer-electronics channel, which is something that industry leader Samsung, the South Korean conglomerate that makes everything from vacuum cleaners to televisions, has been successful at doing, he says. "Samsung has a very vibrant consumer business," Ramberg says.

Last week, we warned that the run in DRAM prices was over, and that there was trouble ahead for chipmakers after downgrades by Dresdner Kleinwort Wasserstein. But even they were caught off guard by the magnitude of Micron's stumble, having pegged the company's first-quarter loss at only 21 cents a share.

Despite a 62% increase in revenues, Micron reported a whopping net loss of $315.9 million, or 52 cents a share, for the quarter ended Nov. 28, compared with a deficit of $265.9 million, or 44 cents a share, in the corresponding year-earlier period.

Micron's sales soared to $685.1 million from $423.9 million. Worldwide DRAM sales are estimated at $16.2 billion for 2002, up nearly 37% from a year ago, says Gartner Dataquest, a tech-research outfit. But prices for the types of DRAM chips that Micron emphasized plunged 12%. The reason: Micron produced too many of the wrong chips (synchronous DRAM). The company could not nimbly shift the majority of its efforts toward making "double-data rate," or DDR, memory products, which were in tighter supply and consequently fetched higher prices.

Burn, Baby, Burn

As a result, Micron is in quite a jam. It is burning through cash like there's no tomorrow, which is appropriate in the perverse sense that Ramberg thinks there should be no tomorrow for Micron.

Micron has repeatedly proven that it is incapable of making money from DRAM, Ramberg argues. The company torched about $328 million in cash during the November quarter. At that rate, it has only two or so quarters of reserves remaining, semiconductor analysts predict. For its part, Micron management contended that the burn rate will decrease during the next two quarters, providing that DRAM prices firm up or improve slightly -- which is far from certain.

So what is likely to happen? Micron will either have to raise money or it will have no more tomorrows, Ramberg says. In fact, he is convinced that Micron is angling for a government bailout &agrave; la Chrysler and Lee Iacocca.

"That is their whole fallback position," Ramberg attests. "Micron will argue that its technology is too important, from a national standpoint, to let fail."

To that end, Micron is complaining that its South Korean rivals, Samsung and Hynix Semiconductor, received multibillion-dollar subsidies and loan packages from the Korean government. Recently, the U.S. International Trade Commission made a tentative ruling that South Korean-made DRAM chips are damaging the U.S. semiconductor industry.

The ruling came after Micron filed complaints with the U.S. Commerce Department and the International Trade Commission in November. In its complaints, Micron is putting the blame for its financial losses on an uneven playing field created by the alleged subsidies.

Separately, the Commerce Department is investigating whether the South Korean chipmakers did, in fact, receive illegal support, but both Samsung and Hynix are defiantly maintaining their innocence, denying Micron's accusations.

Meanwhile, Ramberg maintains that the international trade flap is just a smoke screen meant to hide Micron's fundamental flaws -- and a precursor to asking Congress for an undeserved handout. Despite Micron's charges, Hynix doesn't appear any better off than its U.S. competitor. Its creditors are putting together a third rescue package, including a debt-for-equity swap that might help the world's third-largest chipmaker stay solvent.

"The commonality between Hynix and Micron is that they both failed to make consumer products, and they both failed to make money at DRAM," Ramberg says. What's more, he adds, Micron is a repeat performance of Hynix, which hedge-fund managers have shorted with success and traded around as the company struggles to stay afloat.

"We love to watch history repeat itself. We're hoping to find more stories like Hynix, where the investor community will provide more ripe opportunities for the hedge funds to achieve returns far, far above those of our trusted 401(k) providers," Ramberg wrote in a note to clients.

Needless to say, Micron is one stock that should be shunned by the buy-and-hold crowd and be left for the pros, Ramberg says. Soon, a sell-side analyst will slap a buy on Micron, which is exactly what the hedge funds are banking on.

"They are counting on it," Ramberg says. "They are counting on somebody to provide an analysis that this is a trough valuation," and then, after a quick spike, they will short the heck out of it.

Micron was unable to tap the high-margin DDR-memory sweet spot throughout this year's DRAM spurt, Ramberg argues, but it was not until last week that management indicated just how badly it missed that opportunity to capture profits. Now, management is likely to ask Congress for a bailout.

"Folks, please find the phone numbers of your elected representatives in Washington and warn them: Micron's coming and if they give them your money, or a U.S. loan in guarantees, you will vote them out of office!" Ramberg advised in his note, which included a phone roster for every senator on the Hill.

Says Ramberg: "Do it. Do it now."

Not So Bloody Bad

At first glance, the uppity United States of Europe (aka the European Union) appeared to be taking a swipe at our favorite printer-makers. But upon further review (as they say in the NFL), a ruling by the European Parliament last week targeting makers of printer cartridges shouldn't have serious impact on Hewlett-Packard and Lexmark, says Toni Sacconaghi, Sanford Bernstein hardware analyst.

"The bottom line is that the [ruling] only goes into effect in 2006, and we expect no material effect on Hewlett-Packard -- though there could be some modest longer-term impact on Lexmark's earnings in 2008, owing to possible restrictions placed on the use of "smart chips" in its laser-toner-supplies business," Sacconaghi wrote in a note.

The ruling wasn't a broadside against American tech companies. Instead, it addressed the recycling of products made by electronic companies, he says.