Bank of America Merrill Lynch upgraded Micron (MU) two notches to Buy from Underperform today, stating that the maker of memory chips has several positive catalysts, including easing supply, strengthening chip demand, and higher selling prices.

SUPPLY TIGHTENING: A few of Micron's competitors are reducing the number of chips they produce, Bank of America noted. Specifically, Toshiba's (TOSBF) new factory will probably be delayed, while Samsung (SSNLF) is looking to produce fewer but more profitable chips in order to help fund its return of cash to shareholders, while Tsinghua is having difficulty building its new factory because of problems accessing 3D NAND flash memory technology, the firm stated.

DEMAND STRONGER: Due to increased memory capacity in smartphones and new applications such as connected cars, demand for chips is rising, Bank of America believes.

PRICE, EPS OUTLOOK: Bank of America raised its chip price estimate by 10%-30%, as the firm thinks that the sector's expansion will last longer than it previously believed. As a result, the firm now expects Micron's earnings per share to reach $2-$3, versus its previous estimate of $1 or less.

TARGET: The firm set a $35 price target on the stock.

WHAT'S NOTABLE: UBS analyst Stephen Chin yesterday wrote that Micron's near-term trends "remain solid," as near-term flash memory prices are still "favorable." Moreover, improved execution and the release of Apple's (AAPL) iPhone 8 should boost Micron's results, according to the analyst, who believes that Micron's next three quarterly results will beat expectations. Chin kept a $30 price target and a Buy rating on the shares. However, UBS analyst Nicolas Gaudois lowered his stance on the Memory Semiconductor sector to Neutral, contending that it may "be time to pause" on stocks in the group following a strong rally. Gaudois said he expects DRAM contract prices to go up 15% sequentially in Q1, which would mark their strongest growth since 2009. However, his analysis shows that DRAM sell-in into the channels may have been 2% higher than end demand, which could negatively impact demand. Additionally, the analyst forecasts about 2% of NAND industry oversupply by 2018 as demand growth gradually comes down. In his sector downgrade, Gaudois explained that the key difference between the consensus view and his own is that he expects calendar 2017 to be the profit peak for DRAM.

PRICE ACTION: In morning trading, Micron rose 2% to $24.74.