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Tickers in this Article: MU, MS, INTC, AMD, AAPL
Well, chip maker Micron Technology (NYSE:MU) beat the street's earnings estimates for its recent quarter. I suppose it's a victory, but not much of one.

Micron lost 21 cents per share; this was a penny better than the consensus estimate of 22 cents per share. Some estimates ran into a loss in the mid-30s. The market's selloff reaction to the earnings release was telling in itself.

By The Numbers
For the past year, this Micron Technology has ranged between a high of around $16 per share and a low around $11 per share. In the few days prior to the company's earnings release the stock rallied a couple of bucks from the mid-ten's to about $12 per share. Immediately following these stellar results, the stock was hammered back to the $10 range. Wall Street's commentary sure does tend to be quick and to the point! (For added insight, check out Understanding Investor Behavior.)

Micron Technology manufactures dynamic random access memory chips, which, frankly, have become a commodity. Last Tuesday's announcement of a third losing quarter in a row was greeted with a muted enthusiasm. Micron reported a loss of $158 million on sales of $1.44 billion compared with a net, positive income of $64 million just one year ago.

The memory industry as a whole seems to be struggling. Morgan Stanley's (NYSE:MS) analyst Mark Lipacis has issued an 'underweight' rating on many of the chip makers, including giants Intel (Nasdaq:INTC) and Advanced Micro Devices (NYSE:AMD). Even Micron Technology acknowledges that DRAM prices could decline by as much as 10% and NAND-type flash memory chips, such as those used in Apple's (Nasdaq: AAPL) iPod could very possibly take a drubbing of about 25%. The fundamental problem is that there is too much capacity and too much unused inventory out there. It's that simple.

You Can't Spend an IOU
Micron Technology is carrying, in round numbers, about $1 billion in accounts receivable - basically corporate IOUs. This is a disturbing trend, as this number has increased roughly 18% since last quarter. You can't spend a receivable until it's actually received, and this trend cannot go on for much longer. The longer these receivables stay that way, the less likely they are to be turned into cash.

Micron's senior management is putting the best light on this situation it can, saying it is a function of demand and production. However, if Micron cannot collect on these receivables, its balance sheet is going to start to become an issue with both equity and debt investors.


So, Now What?

I'd argue that it is time for the senior management at Micron to get with the program. It needs to start collecting on these IOUs and start getting involved in some proprietary products and stop relying on the 85% of the company's revenue that comes from commoditized memory products.

Micron Technology is a major force in the memory and sensor business with ultimate end markets that include PCs, workstations, cell phones and a plethora of consumer and industrial applications. At the rate technology is expanding, the opportunity is there for the firm's research and development team to do more than they have been. There is one very simple concept here - this company's return on equity is in negative territory and that is unacceptable to shareholders.

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