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Micron (MU) to Post Q3 Earnings: Disappointment in Store?

Zacks Equity Research

Micron Technology Inc. MU is set to report third-quarter fiscal 2019 results on Jun 25.

Notably, the company’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters, missing the same once, the average positive surprise being 1.72%.

In the last reported quarter, the company’s non-GAAP earnings per share of $1.71 lagged the Zacks Consensus Estimate of $1.73 and also declined from the year-ago quarter’s figure of $2.82.

Moreover, revenues dropped around 21% on a year-over-year basis to $5.84 billion and fell shy of the Zacks Consensus Estimate of $5.92 billion too due to higher-than-expected fall in DRAM and NAND pricing.

Notably, seasonality, weak smartphone and enterprise server sales, inventory adjustments with several key customers, pause in cloud hardware spending and Intel’s CPU shortages adversely impacted the company’s performance.

Consequently, the company’s issuance of a tepid guidance for the fiscal third quarter makes us apprehensive about its performance.

Estimates and Guidance for Q3

Micron projected revenues for third-quarter fiscal 2019 at around $4.8 billion (+/- $200 million).

The Zacks Consensus Estimate is currently pegged at $4.72 billion, suggesting a drop of almost 39.4% from the year-ago reported figure.

The company envisions non-GAAP earnings per share to be roughly 85 cents (+/- 10 cents).

The consensus mark for earnings currently stands at 80 cents, indicating a plunge of 74.6% from the prior-year reported number.

Micron Technology, Inc. Price and EPS Surprise

Micron Technology, Inc. Price and EPS Surprise

Micron Technology, Inc. price-eps-surprise | Micron Technology, Inc. Quote

Factors at Play

Micron’s third-quarter fiscal 2019 results are likely to be hurt by a perpetual reduction in DRAM and NAND flash pricing due to oversupply and lower-than-expected growth in end-market demand.

Higher level of customer inventory in the cloud, graphics and enterprise market is a key threat. Moreover, soft server demand from several enterprise OEM customers is a concern.

Additionally, worse-than-expected CPU shortages coupled with macroeconomic uncertainties are likely to pose key challenges to the company in the soon-to-be-reported quarter.

Notably, Micron’s overexposure in China makes the U.S-China trade war a major overhang on the company. Moreover, starting mid-May, the company suspended chip shipments to Huawei, which accounted for nearly 13% of its revenues in the last two quarters, in response to the export ban imposed by the U.S. government.

However, considering the timing of the ban, it remains to be seen how much impact it has on the company’s performance in the soon-to-be-reported quarter.

Amid such challenges, the company’s focus on increasing the mix of high-value solutions in its portfolio is a tailwind.

On the last earnings call, management mentioned that more than two-thirds of NAND revenues in the first half of fiscal 2019 were from high-value solutions, soaring 55% over the same period last year. We expect strong growth in managed NAND products to boost its Mobile Business Unit revenues in the fiscal third quarter.

What Our Model Predicts

The proven Zacks model conclusively shows that a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has maximum chances of beating estimates if it also has a positive Earnings ESP. Zacks Rank #4 (Sell) or 5 (Strong Sell) stocks are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Micron carries a Zacks Rank of 5, which lowers the predictive power of ESP, and an Earnings ESP of -7.42% in the combination, which decreases the odds of a likely positive surprise for the stock this time around.

Stocks With Favorable Combination

Here are a few stocks worth considering as our model shows that these have the perfect mix of elements to beat on earnings in the upcoming releases:

Applied Materials, Inc. AMAT has an Earnings ESP of +0.14% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Alteryx, Inc. AYX has an Earnings ESP of +22.41% and a Zacks Rank of 2.

Verizon Communications Inc. VZ has an Earnings ESP of +4.35% and a Zacks Rank #3.

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