A recent article considered memory manufacturer Micron Technology (MU). A considerable amount of well-advised money is behind the company's stock. Marketplace dynamics involving supply and demand are central to its story; and a specified risk is probably actually going to result in another positive for the corporation.
I opened a stake in Micron after its recent selloff on the 18th, that is attributed to competitor SK Hynix (OTC:HXSCL) spending $3.8 billion on a new facility to produce memory. It occurred the same day of an anticipated announcement, between Apple Inc. (AAPL) and China Mobile (CHL), to sell iPhones, which use dynamic random-access memory ("DRAM"). The deal was recently announced and it may be beneficial to Micron.
There is an underpublicized consideration that should be in Micron's favor and deserves attention. It involves the company's widely lauded acquisition of Japan's Elpida Memory, a probable supplier of DRAM to Apple. Here is an excerpt from the corporation's Form 10-K, which ironically should reinforce a case for investors:
Our acquisitions of Elpida and Rexchip expose us to significant risks from changes in currency exchange rates... we committed to support plans of reorganization for Elpida that provide for payments to the secured and unsecured creditors of Elpida in an aggregate amount of 200 billion yen. The U.S. dollar amount of this payment obligation could increase if the yen strengthens against the U.S. dollar. Additionally, a significant portion of Elpida's and Rexchip's operating costs are paid in Yen and New Taiwan dollars so our operating results subsequent to the acquisition could also be adversely impacted if these currencies strengthen against the U.S. dollar.
Currency traders have long been aware of the Yen's depreciation against the dollar. However, some are betting on its further decline in consideration of ongoing Abenomics, a Japanese policy involving intentionally devaluing its currency; and tapering of Quantitative Easing in the USA, which has just been announced. Indeed, shorting the Yen has been one of the popular trades on Wall Street. Here is what the CurrencyShares Japanese Yen Trust ETF (FXY) has done in 2013:
Clearly this "Risk" is what actually tends to be described as an incremental positive.
However, there are aspects of the company that can place it within billionaire short seller James Chanos' guidelines for a value trap - as opposed to a value stock. Here is a table drawing upon a past presentation by a man who has made a fortune through being ahead of (highly paid) analysts while doing work with similarities to that of regulators:
Predictable, consistent cash flow
Defensive or defensible businesses
Overly dependent on one product
Independence from superior management
Hindsight drives expectations
Margin of safety using many metrics
Cheap using management's metric(s)
Transparent financial statement
Micron is known for being cyclical. Further, it gets 65% of revenue from DRAM memory, according to Sterne, Agee & Leach. I am not sure that any business is clearly 100% on one side or the other of the table above. Overall, the storyline involving long-term supply and demand appears compelling enough for future months; and requires caution over the long term.
There are multiple drivers for Micron's continued share appreciation. The market should continue to recognize them. However, there are also trap-like considerations that might have bearing in its distant future. Consequently, caution is indicated.