Micron Earnings Preview: A 'NewCo' Or Same As It Ever Was?

| About: Micron Technology (MU)

Micron Technology (NASDAQ:MU) is scheduled to report fiscal Q1 2014 financial results after the bell on Tuesday Jan 7, 2014.

Analyst consensus is expecting $0.44 in earnings per share (EPS) on $3.7 billion in revenues, for expected year-over-year growth of quite a bit in both metrics, as MU is lapping a loss of $0.27 per share on $1.8 billion in revenues. Neither metric (in my opinion) contains the Elpida acquisition, so in one respect we are comparing apples and oranges.

Exiting the fiscal 4th quarter of 2013 reported in September 2013 the consensus revenue and EPS estimates for Q1 14 were $3.7 billion and $0.43 per share, so the analyst consensus numbers have been stable over three months.

Gross margin is expected in the 35% neighborhood.

Here is the consensus estimate trend for MU EPS and revenues for fiscal 2014 and 2015:

Fiscal '14 and '15 EPS and revenue estimates for MU
Month end '14 EPS '15 EPS '14 rev '15 rev
12/31/13 $2.09 $2.28 $15.1 $15.88
11/30/13 $2.05 $2.25 $15.1 $15.77
10/31/13 $2.04 $2.24 $15.1 $15.86
9/30/13 $2.10 $2.32 $14.36 $15.7
Click to enlarge

* Source: Thomson Reuters estimate detail for MU

Full year 2014 consensus for MU is currently expecting $15.1 billion in revenue and $2.08 per share versus the actual 2013 metrics of $9 billion and a loss of $0.18 per share.

Semiconductor and memory stocks had a very good 2013 as supply remains constrained, and analysts are now talking about the proverbial "paradigm shift" in structural memory supply which could result in an endless "up cycle" that will drive another strong year for the memory suppliers.

To be frank, as an investor in semis from the mid 1990s and having been burned badly by the cycle more than once, comments like the above have me worried, and more than a little.

There are two questions that I keep mulling as I ponder MU's stock within client accounts:

1.) Does the Elpida acquisition put MU firmly in a business where they are a supplier of a product with secular growth prospects (i.e. Mobile DRAM), and help temper the vicious cyclicality and boom, bust cycles of DRAM production?

2.) Is the current new paradigm around "structural supply constraints and more disciplined production" just more clap-trap and bullish investor relations speak, which has been heard near the top of every cycle, or is these some substance to the supply constraints?

To be honest, I don't have a good answer to either question, although the January 7 results and hopefully guidance will give us some direction.

Again, to be forthright and upfront, we are leaning a little bullish on MU and to the long-side thanks to the better secular growth prospects of Mobile DRAM, which could put MU squarely in the sweet spot of supply as they were with PC-related DRAM in the mid-1990s, but the fact is whatever memory it is, supply comes online so quickly and with such speed, forecasts and EPS / revenue estimates can change dramatically within a 30 day time frame. In addition, despite the continuing negativity around PC growth, PCs should eventually return to low-single-digit annual growth rates, and thereby DRAM should eventually see some supply improvement driven by PC demand. (PCs aren't dead yet.)

Valuation: Micron's current consensus EPS estimates for fiscal 2014 and 2015 are $2.08 and $2.28 for expected year-over-year growth of 10% in 2015. After we get through the Elpida bump to numbers in 2014, Street consensus is looking for just 5% and 0% revenue growth in 2015 and 2016, which is expected to generate just 10% and 11% earnings growth in fiscal 2015 and 2016.

At 11(x) cash-flow and virtually no free-cash-flow yet, the cash-flow metrics aren't compelling either.

Here is how wide Street valuation estimates can be on MU: Morningstar, which uses a multi-variate discounted cash-flow model to value companies, has an intrinsic value estimate on MU of $10 per share. Our earnings based model which uses a target p.e ratio on a forward-earnings estimate (for all companies, not just MU or tech companies) values MU at $40 per share. I then take an average "intrinsic valuation" estimate, which in MU's case would be $25, and use that as a rough estimate, with a bias around earnings estimate revisions. Simple enough?

Technicals: When MU broke above $18.65 in November, 2013, the stock broke out of a 7-year consolidation from where it broke down in September, 2006. We remain long MU with a bullish bent, but weakness in the stock of late has been driven by worries over Hynix's Wuxi facility coming back online, after capacity was removed thanks to a fire, in 2013.

We would like MU to hold $20 or the 50-day moving average on any earnings-related drop, and ultimately we would like to see the September '06 high of $18.65 hold as support. Higher volume trade below $18.65 and we would likely re-think our long position in MU.

Conclusion: Supply around memory and DRAM / NAND remains the key aspect to stock price direction. We do think the Elpida acquisition puts MU in a good space - Mobile DRAM - although I have no idea how supply constrained or excessive Mobile DRAM can be relative to other DRAM, so time will tell. From what we've read, per one source, no suppliers are planning any wafer starts in 2014, which is pretty important. One analyst suggested 2014 bit growth would see 34% y/y, with just 28% supply growth.

We remain long MU and might add to the stock with a low volume retest of long-term support between $18.65 and $20 per share. This is a very tough stock and very difficult business to model. Maybe Elpida makes MU a more stable, predictable, earnings and revenue generator.

Here is an earlier article written on MU that talks about MU as "an airline with a fab attached." The capex drag was crushing for a DRAM producer, but maybe Elpida and Mobile DRAM changes that calculus.

Like the Talking Heads hit single, "Once In a Lifetime," we continue to wonder of MU is "Same as it Ever Was" (a chronic capital destroyer) or do we have a new company with secular growth prospects and a chance at reasonable returns on capital? I think 2014 will tell us a lot about MU.

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.