Shares of memory chip maker Micron Technology (MU) this morning are up 29 cents, or 2.4%, at $12.61, after R.W. Baird’s Tristan Gerra raised his rating on the shares to Outperform from Neutral, with a $21 price target, up from $18, writing that the company’s DRAM and NAND markets are improving and that it will see lower costs of production as it moves to the next process technology in DRAM manufacturing.

The biggest takeaway is that Micron’s cost structure is improving while DRAM prices decline:

We expect DRAM pricing to decline by about 10% a quarter for the rest of the year, while Micron has an opportunity for a 10-15% improvement in its DRAM cost structure in 2H16 versus 1H16 as a result of an improving 20nm mix.

A big tenet of that view is that Samsung Electronics (005930KS), the heavyweight in DRAM production, will cool off.

“Samsung may shift a meaningful amount of capacity from DRAM to NAND this second half,” writes Gerra, without elaboration. “This would likely be done jointly with the initial ramp of 18nm.”

Gerra also thinks that the “second-half NAND flash outlook is positive,” attributing that to “higher iPhone7 content (which should include a 256GB version) and rapidly rising SSD adoption in PCs,” with the result that “pricing is expected to firm up this second-half, in our view.”

Gerra raises his estimate for 2016 to $12.38 billion in revenue and 5 cents EPS from $12.3 billion and a penny per share.

For 2017, he now sees $12.74 billion and 65 cents a share from a prior $12.16 billion and 15 cents a share.s

By: DocMemory
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