Swap from Micron stock into 1.875% convertibles, Barclays analysts advise

By Rebecca Melvin

New York, April 7 - Micron Technology Inc.'s 1.875% convertibles due 2014 should replace the company's common stock in the holdings of investors who want to express a view on the improvement in Micron's outlook, Barclays Capital equity linked and convertibles research analysts said in a new report.

The fundamentals of Micron have been under stress for the last couple of years, but going forward several factors are in play to help sustain positive price action across the capital structure, Barclays research published Tuesday stated.

Fundamentals were under stress on account of falling dynamic random access memory and NAND flash memory prices driven by excess capacity, high leverage to fund capex as well as a recent debt-funded acquisition, and liquidity concerns on account of upcoming debt repayments and capital contributions to its manufacturing joint ventures.

But consolidation in capacity and steep cuts in capex have helped DRAM and NAND memory prices recover 30% to 50% and less than 100% respectively over the last three months since December 2008.

Micron is one of the major players in the computing memory segment with about an 8% market share, deriving the bulk of its revenues from the manufacture of dynamic random access memory.

Supply-demand imbalances caused a continuous decline in prices until recently, the Barclays research analysts said. In contrast, DRAM and NAND memory prices are expected to continue to strengthen through 2009, the analysts Venu Krishna, Kannan Venkateshwar, and Manoj Shivdasani, wrote.

In light of secular capacity reduction and increasing prices, Barclays recommends that equity holders swap out into the convertibles to express a constructive view on industry consolidation.

Yield to maturity of the convertibles is 17.3% on a premium of 57%. Current yield is 3.8%.

The analysts expect 28% downside if the stock declines further.

Equity investors will be moving up the capital structure via an instrument trading close to recovery value, which limits the downside if the anticipated outlook doesn't play out, the analysts said.

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