Buy Micron On The Pullback?

Oct.13.13 | About: Micron Technology (MU)

After the enormous 265% gain from low to high over the last 52 weeks, Micron Technology (NASDAQ:MU) dropped 8.63% Friday after reporting earnings and now investors have to decide whether to buy on weakness. Taking profits after such an enormous run-up is easy at the first hint of disappointment. But the real question is what is the target for the next 12 months and does it make any sense to buy after missing such an enormous win? Will the institutions roll out of this year's winners like MU? The selling indicates some have decided to take profits and if other portfolio managers decide to sell in the coming days will the front running traders as described in my book take price down to test the 50-day moving average? When the selling stops will the price be a bargain? Jim Van Meerten has already done an excellent article outlining the challenge.

First let's examine the earnings that spooked the price of MU. According to the analysts, the sell-off is a result profit taking and uncertainty over the Elpida acquisition and its effect on the financial metrics going forward. Despite this, one analyst raised his target to $24. Another analyst downgraded it to underperform and portfolio managers are not looking for underperformers in their holdings, especially in a stock that has already had an unbelievable move up in price. But to offset the bad news UBS raised its target to $23 and Jefferies went over the to,p raising their target to $30. So what is the correct target? More importantly, how low is the price going?

First let's determine some price targets based on's low, average and high analyst estimates for revenues and earnings. These may fall lower based on information in the latest quarter's earnings, but as we have seen from the analyst upgrades after earnings, little may change as the good is balanced with the bad news.

Low, Average and High Targets Based on Source Data
Revenues $12.71 Bil. $15.15 $17.49
Earnings $1.17/share $2.08 $2.95
Targets 11 x earnings $12.87 $22.88 $32.45
" 12 x " $14.04 $24.96 $35.40
" 13 x " $15.21 $27.04 $38.25
" 14 x " $16.38 $29.12 $41.30
Click to enlarge

So in the above table we show the array of possible targets based on estimates for Revenues and Earnings and assuming various PE levels to determine targets. I have underlined two I think are reasonable compared to the one-year target of $21.94. Now in the table below you will see the implied returns based on the buy price for Micron using the underlined targets. (At this writing it is at $16.84 still dropping from its high of $18.85.)

Implied Returns for Various Entry Levels and Targets
Buy Price $21.94 target $22.88 target $24.96 target
$14 56.7% 63.4% 78.3%
$15 42.3% 52.5% 66.4%
$16 37.1% 43.0% 56.0%
$17 29.1% 34.6% 46.8%
$18 21.9% 27.1% 38.7%
$19 15.5% 20.4% 31.4%
$20 9.7% 14.4% 24.8%
Click to enlarge

From the above table you can see why some folks were tempted to buy the top around $18 before earnings, even though this was near the high of a very big move up in price.

Finally, the last question to be answered is how low is price going? In my book "Successful Stock Signals", I show you how to do this. But to simplify it here, price looks to be targeting the 50-day moving average at $15.80. The Point and Figure chart shows support at $15.50. Both of these entry levels show very robust implied returns and that usually comes with high risk. Digesting this major acquisition is one of them and the financial metrics will probably not be transparent until the first quarter is reported. Some folks have decided not to wait for the first quarter of consolidated financials. The price will stop dropping when they are finished selling and buyers are once again attracted to the fundamentals and targets noted above.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.