Foolish Forecast: Micron

Memory-chip manufacturer Micron (NYSE: MU  ) is reporting results for Q3 2006 this afternoon. Is the company ready to challenge SanDisk (Nasdaq: SNDK  ) head-on?

What analysts say:

• Buy, sell, or waffle? Twenty-six analysts follow Micron. Eleven rate the company a buy, three are saying "sell," and the other 12 hold the middle ground.
• Revenues. Analysts are looking for 29.7% year-over-year improvement in sales, to $1.4 billion. The growth outlook is healthy, too.
• Earnings. Wall Street expects an average of $0.10 in GAAP profits

What management says:
A hectic spring culminated in the acquisition of Lexar, giving Micron the retail-gadget ammunition it has been seeking in its quest to emulate SanDisk. Micron is transforming from a pure-play chip manufacturer into an end-to-end electronics maker with a guaranteed supply chain.

CEO Steve Appleton sounds ready to take some risks in order to grow his business. In a recent USA Today interview, the former tennis semi-pro said that "small start-up companies make the big bets and take on huge risk. That is why so many go bankrupt. One mistake, and they're gone. What's odd, when you become successful and relatively stable, you can afford more risk. Big companies do exactly the opposite of what they should. They have the resources to be bold."

What management does:
My oh my. With what looks like a full-scale NAND flash memory price war under way, Micron's gross margins have been heavily compressed lately, and the pain trickles down the earnings statement all the way to the bottom line. If Lexar is the savior here, it's coming in the nick of time.

Margins %	12/04	3/05	6/05	9/05	12/05	3/06
Gross	31.9	32	26.1	23.5	20.8	18.7
Operating	9	11.1	5.6	4.2	1.2	(1.7)
Net	6.8	9.4	5	3.9	1.9	3.5

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Lexar clearly won't help today's report at all, since the agreement was signed after the end of the fiscal quarter. But it could make a world of difference in coming quarters. With a consumer brand of its own, Micron can afford to take a harder line in price negotiations with customers like Apple (Nasdaq: AAPL  ) and Hewlett-Packard (NYSE: HPQ  ) . If the other party starts lowballing, Micron can simply build more of its own Lexar-branded MP3 players or thumbdrives.

Couple the promise of better margins with the light at the end of the price-war tunnel, and Micron shareholders could be in for a treat -- next year.

But again, don't expect miracles today. The analyst projections translate into about 5% in net margins, which would be a nice lift over the previous two quarters but far from an earth-shattering success. Mr. Appleton will have to take a few more risks to turn Micron into a margin hog like its main competition. He certainly talks the talk; now let's see him walk the walk.

Competitors:

• SanDisk
• Infineon (NYSE: IFX  )
• Samsung
• Rambus (Nasdaq: RMBS  )

Fool contributor Anders Bylund owns none of the stocks discussed here. Remember the Fool's disclosure rules , or suffer the consequences, Fool!