- Goldman Sachs is recommending a 3-6 month long global DRAM/short Micron (NYSE:MU) pair trade. Firm's recommendation is driven by: 1) their view that global DRAM makers will continue to benefit from strong DRAM fundamentals through CY1Q2007, and 2) belief that Micron is unlikely to benefit from the current strength in DRAM to the same extent as its global peers. As a result, while strong DRAM fundamentals have driven Micron's stock to increase along with its global peers in recent months, the firm would expect the stock to begin a downward trend in the coming quarters
Regarding the DRAM market environment, the firm believe sthat the recent strength in DRAM fundamentals has been driven by: 1) Production issues at several DRAM makers (trench producers), as well as Micron's reduced bit shipments into the DRAM market, both of which have contributed to the recent DRAM capacity tightness, and in turn an increase in DRAM pricing, and 2) DRAM content per box growth being pulled forward into 2006 to meet Vista specifications. While Goldman's global team does expect DRAM fundamentals to pause beginning in CY1Q2007, they recommend that investors go long the global DRAM stocks (specifically ProMOS, Powerchip, and Elpida) against Micron given current strong fundamentals in DRAM and attractive valuations, as the Asian DRAM stocks are much more attractively valued than Micron and are fully benefiting from the strength in the commodity.
Micron continues to trade at 1.7X price to book value and 2.3X price to sales versus its Asian DRAM peers that are trading at 0.7X to 1.5X price to book value and at 1.1X to 1.8X price to sales. Firm continues to expect ~30% downside to their 12-month price target on MU of $12.00, which is based on a very aggressive 30X multiple applied to estimated normalized EPS of $0.40.
Notablecalls: Check out my comments on MU two weeks ago. The trade is working out nicely. Would not be surprised to see the shares produce a bounce over the next 2-3 days. That's what usually happens after a tier-1 firms comes out with a rec like this one. But overall, this one will continue to work.
Regarding the DRAM market environment, the firm believe sthat the recent strength in DRAM fundamentals has been driven by: 1) Production issues at several DRAM makers (trench producers), as well as Micron's reduced bit shipments into the DRAM market, both of which have contributed to the recent DRAM capacity tightness, and in turn an increase in DRAM pricing, and 2) DRAM content per box growth being pulled forward into 2006 to meet Vista specifications. While Goldman's global team does expect DRAM fundamentals to pause beginning in CY1Q2007, they recommend that investors go long the global DRAM stocks (specifically ProMOS, Powerchip, and Elpida) against Micron given current strong fundamentals in DRAM and attractive valuations, as the Asian DRAM stocks are much more attractively valued than Micron and are fully benefiting from the strength in the commodity.
Micron continues to trade at 1.7X price to book value and 2.3X price to sales versus its Asian DRAM peers that are trading at 0.7X to 1.5X price to book value and at 1.1X to 1.8X price to sales. Firm continues to expect ~30% downside to their 12-month price target on MU of $12.00, which is based on a very aggressive 30X multiple applied to estimated normalized EPS of $0.40.
Notablecalls: Check out my comments on MU two weeks ago. The trade is working out nicely. Would not be surprised to see the shares produce a bounce over the next 2-3 days. That's what usually happens after a tier-1 firms comes out with a rec like this one. But overall, this one will continue to work.
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