Micron: If You Can Buy Only 1 Stock, Make It Micron

Jun. 6.13 | About: Micron Technology (MU)

If you could only buy one stock, buy XYZ Corp! Our very best idea is XYZ Corp!

How many times have you heard those little tidbits shouting at you from the pages of investment letters and webpages?

OK, here we go. Micron (NASDAQ:MU) is a major memory manufacturer that is on the verge of getting even more "major." The company is in the late stages of acquiring the only remaining Japanese memory manufacturer, Elpida.

Recently, a Japanese court dismissed an appeal by some small unsecured creditors, so the deal is a virtual certainty to get done. While there was a small measure of uncertainty, Micron was reluctant to discuss how good a deal Elpida really is. Not anymore!

The company mentioned some interesting new details during a Bank of America presentation attended by Micron on June 5, 2013.

The company actually told us the total wafer capacity of the combined companies is 600,000WSPM (Wafer Starts Per Month) at minute 2 in the presentation.

The other key fact I heard for the first time is that Elpida will be accretive to Micron earnings.

The 180,000WSPM capacity from Elpida would cost $6-8 billion to build new. Micron is paying $2 billion for it.

Apple (NASDAQ:AAPL) did its part by giving Elpida orders for mobile DRAM that now amount to about 80% of the mobile DRAM output of Elpida. Figure that -- Apple buying from a bankrupt company.

Let's try to figure some things out:

Back when Micron made this deal with Elpida, the contract price for DRAM was about $.70 for a 2Gb chip or a negative 50% gross margin. NAND memory was marginally profitable.

Today the average between contract and spot price for that 2Gb DRAM part is about $1.70, up 142% since December 3, 2012, and now sports a gross margin of about 40%. NAND has also increased in price and decreased in cost to the point that NAND produces about 50% gross margins.

For simplicity, I'm going to assume that all NAND parts sold are 128Gb parts and all DRAM parts sold are 4Gb parts. The average between contract and spot price for these parts is about $12.50 for the NAND and $3.00 for the DRAM.

The big NAND chip probably yields about 250 good die per wafer, so a NAND wafer produces about $3200 in revenue. The big DRAM chip probably yields 950 good die per wafer, so a DRAM wafer now produces about $2800 in revenue. I think we can agree on average wafer revenue of about $3000.

The breakeven cost of memory wafers is about $1300, give or take.

Now we know for sure that the combined company has 600,000WSPM capacity or 7.2 million wafers per year. A little arithmetic gives a revenue number of over $21 billion. Cost should be about $9 billion. Gross profit should be $12 billion. Total OpEx should not exceed $6 billion. That gives an operating profit of about $6 billion. Neither company will pay any cash income tax (although they will provide about 10% for it).

As recently as February 12, 2013, President Mark Adams alluded to a $16 billion "clip" (sales rate) (12 minute point) for the combined company. Prices have increased another 30% since then.

You can move the numbers any way you want, but the new Micron earns dollars instead of dimes. If this rate of business and profit doesn't appear in the results to be reported on June 19, it will work its way toward those numbers during the next three quarters.

The question is, "what will the market pay for a share of Micron that earns $5?" A P/E of 10 would take it to $50 or more. Eventually. I say eventually because it has been my experience that many analysts and institutional investors are dumbfounded by these big moves and don't catch on for a while. When they do catch on, they could "bubble" it up to $100/share.

So, this is the "Single Best Idea" that I have for the next two years, and "if you could only buy one stock," make it Micron.

Disclosure: I am long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.