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DRAM prices drag Micron down

As worldwide DRAM prices have fallen, so has Wall Street's estimation of Micron Technology.

As worldwide DRAM prices continue to fall, Wall Street's estimation of DRAM maker Micron Technology (MU) has fallen along with them.

After a week that saw the company's stock trade higher than $60 per share, several analysts have lowered their expectations and recommendations on Micron this week. Micron is currently trading in the mid to low $40 range.

Asian DRAM manufacturers, which dominate the market, are also struggling under increasing pricing pressure. But Micron's U.S. competitors are expected to absorb that pressure more easily.

"Micron's stock is more tightly linked to DRAM because Micron doesn't play in so many other businesses," said Dataquest analyst Jim Handy. And while DRAM typically accounts for less than 20 percent of a chipmaker's business, it represents as much as half of Micron's, according to one analyst.

DRAM pricing has declined about 28 percent per year since 1974, according to Dataquest. A period of stability from 1992 to 1995 resulted from a shortage of chips, but when capacity caught up with demand, the prices caught up as well. "We've fallen into a normal price decline," said Handy. "There was an awful lot of pent-up price reduction."

Asia holds the lion's share of DRAM production, with Samsung, NEC Japan, Hitachi, Hyundai, LG Semicon, and Toshiba occupying the six top spots for 1996 revenue. Those companies have responded to the price decline in various ways, including moderating production, turning over DRAM manufacturing capacity to produce other chips, and accelerating production of 64MB DRAM over the mainstream 16MB DRAM.

Micron's American competitors have responded by reducing their involvement in the DRAM market or pulling out of the market altogether. Motorola announced its exit earlier this year, and Texas Instruments signaled its continued withdrawal when it pulled out of a Thai DRAM manufacturing plant in May.

"Texas Instruments has done a really good job of reducing revenue and profit dependence on DRAM," said Dataquest analyst Ron Bohn, "They're about 15 to 20 percent dependent on DRAM, whereas 20 years ago it was maybe 80 percent."

Another U.S. manufacturer of DRAM is IBM. But because the company produces many of its chips for internal use, and also purchases chips for its PCs, the effects of pricing fluctuations are practically neutralized, according to Bohn.

Handy urged a long view of the DRAM market. "Analysts thought that because prices were stable from January to July, they would remain flat. Now that prices have started to fall again, they downgrade Micron, but it doesn't have anything to do with the company's performance."

Merill Lynch analyst Thomas Kurlack lowered Micron to "near-term neutral" from "accumulate" and lowered his long-term rating to "accumulate" from "buy." Kurlack cited potential for margin pressure in cutting fiscal 1998 earnings estimate to $2.75 per share from $4.05 per share.

Kurlack said he thought 16MB chips had peaked in the fourth quarter, and that Micron's second quarter revenues would decline as the company made the transition to 64MB chips.

PaineWebber analyst John Lazlo lowered his fourth-quarter estimate range to 20 cents to 41 cents from 62 cents, in addition to lowering his revenue forecast to $985 million from $1.1 billion. Lazlo maintained a "neutral" rating on the company, citing price degradation.

William Milton, at Brown Brothers Harriman, downgraded Micron to "sell" from "avoid," also citing DRAM prices and overcapacity.

Reuters contributed to this report.