MU: Stock Ignoring DRAM Prices, Elpida Potential, Says Jefferies

Jefferies & Co.‘s Sundeep Bajikar this today reiterates a Buy rating on shares of Micron Technology (MU) and an $11 price target, writing that investors are “ignoring strength in market DRAM prices,” when when combined with Micron’s industry-leading server DRAM mix, translate to higher gross margins” the latter half of this year and in calendar 2013, he thinks.

Bajikar also had some choice words about a potential deal between Micron and bankrupt Japanese memory maker Elpida Memory (ELPDF).

About 80% to 90% of Micron’s DRAM revenue is determined by contract prices, writes Bajikar. Overall DRAM contract pricing rose 33% in May from the December levels, he notes, faster than the 14% rise in “spot” prices of DRAM this year.

Bajikar posits that if Micron’s average selling price for DRAM this calendar year declines by only30%, it could mean an extra five percentage points of gross margin come 2013, on top of the 25% gross margin he’s already been positing. Gross margin is expected to be just 18% this year.

The Street is currently modeling 15% for this fiscal year ending in August and 25% next fiscal year.

Bajikar actually cut his revenue model for this fiscal year to $8.11 billion from a prior $8.16 billion, and cut his EPS estimate to a loss of 75 cents from a prior estimate for a loss of 66 cents. He thinks the Street estimates for the current� quarter are too high, at $2.02 billion and a 19-cent loss, versus his estimate for $1.9 billion and a 27-cent loss.

But Bajikar also thinks the stock has already priced in a potential Q2 miss. He also thinks the shares are baking in a potential agreement to be Elpida’s sponsor for a route out of bankruptcy. The shares currently reflect an enterprise value-to-sales multiple of 0.7 times, he writes.

Elpida said on May 10 it was in discussions with Micron. The next milestone for any deal is teh bankruptcy court deadline for a filing regarding reorganization claims, which would be June 19th.

But investors are probably too negative on such a deal:

While we believe investors understand relatively well Micron could directly benefit from Elpida’s strength in mobile DRMA, we do not think investors appreciate that Elpida could be highly accretive to Micron’s server DRAM business.

Micron shares are up 4 cents, or 0.8%, at $5.96.