Micron Technology Inc. (MU) reported a solid fiscal first quarter enhanced by the acquisition of Elpida. The company's revenue increased 42% sequentially and the profitability profile improved. That said, the post-acquisition growth rate will slow and Micron remains an average to below average company, from the profitability prospective.
MU data by YCharts
The Elpida move enhances the company's mobility solutions portfolio, which is a key strategic move that should benefit investors over the next several years. The DRAM and NAND markets are growth markets. So, there is a favorable industry dynamic.
Based on its fundamentals, MU deserves a market multiple, and at 2.6 times book and 70 times adjusted earnings, it is at best fairly valued. I continue to think of Micron as too pricey and expect a decrease in the rate of share price appreciation.
- MU reported fiscal first quarter revenues of $4.04B and GAAP net income of $358M.
- The analyst conference is on Friday, Feb. 7, 2014 at 9 a.m. ET.
- Joel Poppen was appointed vice president of legal affairs, general counsel and corporate secretary.
- MU and Broadcom are collaborating to solve DRAM timing challenges, and deliver improved performance for networking customers.
Micron Technology, Inc. is a global leader in advanced semiconductor systems. MU's broad portfolio of memory technologies is the basis for solid state drives, modules, multichip packages, and other system solutions. The organization's memory solutions enable the world's most innovative computing, consumer, enterprise storage, networking, mobile, embedded and automotive applications.
Sales from DRAM and NAND Flash products increased during the fiscal first quarter of 2014, relative to the fiscal fourth quarter of 2013. DRAM products revenues were 69% higher on the acquisition of Elpida. And NAND Flash products revenues were 8% higher on an 11% increase in units sold. Rising sales led to an increased gross margin, which was mostly attributable to the acquisition and the product mix.
MU Revenue (Quarterly) data by YCharts
Relative to the fourth quarter of 2013, net sales increased 42%, which is mostly attributable to the acquisition of Elpida. Operating income increased 166% and the operating margin was 13.6%, which increased from 7.3% during the fiscal fourth quarter. Net income, excluding the gain from Elpida, increased 60% and the net profit margin was 8.9%, which increased from 7.9%. So, the acquisition of Elpida made Micron an average to below average concern, from a profitability perspective, thus far.
MU Profit Margin (Quarterly) data by YCharts
At the end of the fiscal first quarter, the cash ratio was 0.86, which was up from 0.75 at the end of the prior quarter. The current ratio was 2.08, at the end of the first quarter. The firm is on solid ground from the liquidity perspective. The EBITDA to interest ratio during the first quarter was 9.57. The financial leverage ratio was 1.95, which was down from 1.91 at the end of the fiscal fourth quarter. The solvency position appears solid.
From an activity perspective, receivables increased 21.6% from the prior quarter and inventories decreased 7%, both accounts diverged from the financial performance. The receivables turnover ratio during the quarter was about 6.5 with an inventory turnover ratio of about 4.3. Management may be expecting a declining demand environment.
Is MU likely to create value for me over the next year? The analysis suggests that the answer is "yes." Over a full cycle, the answer is not as clear-cut; in other words, over a full cycle, Micron is likely to produce less value added than a significant amount of alternative investments.
- The share price is likely to remain volatile and investors could lose a portion or all of their investment.
- Investors should judge the suitability of an investment in Micron in light of their own unique circumstances.
- A decline in the global economic growth rate and/or a decline in the pace of economic growth in the United States could adversely impact the results of operations and the share price.
- The technology industry is characterized by rapid technological change, which could materially adversely impact the results of operations.
- Competition in product development and pricing could adversely impact performance.
- Incorrect forecasts of customer demand could adversely impact the results of operations.
- Higher interest rates may reduce demand for Micron's offerings and negatively impact the results of operations and the share price.
This section does not discuss all risks related to an investment in Micron.
Valuation & Portfolio Management
While the strategic acquisitions of Elpida and MMT enhance MU's position in mobile DRAM, the share price increase is mostly attributable to the broader market increase, loose monetary policy, and general macroeconomic trends. Retail investors appear to believe that the share price increase is being driven by company specific fundamental factors. This belief represents a significant misconception. Consequently, there could be substantial downward revisions to return expectations, which could create an opportunity for windfall profits.
There isn't much of a diversification benefit from investing in MU, relative to the S&P 500 (SPY). The correlation since 2009 is 0.73. Since 2011, the correlation is 0.82. And since 2013, the correlation is 0.95. All three correlations are statistically significant at the 95% confidence level, relative to zero correlation.
Thus, variations in the share price of the S&P 500 explain a substantial amount of the variations in the share price of MU. Since 2009, the portion of the variation in the share price of MU explained by the share price of the S&P 500 ranged from 53% to 91%. Most importantly, 91% of the rally since 2013 is explained by the rally of the S&P 500, which suggests that a small portion of the rally is attributable to company-specific factors. Consequently, forecasts for the share price of MU should include forecasts for the broader market.
I employ 3-month, 6-month, and 12-month price targets. The price targets are $13.25, $13.66, and $14.66, respectively. At $23.68 per share, MU is trading above trend, which suggests a period of underperformance is likely in the coming months.
Is MU likely to outperform the broader market? My model says, "yes." I place the chance of outperformance at 75%. Granted, that outperformance could mean MU declines less than the broader market.
MU Price to Book Value data by YCharts
Based on the fundamentals of the company, it should be priced at a near market multiple. MU is currently trading at 2.63 times book value and 70.3 times adjusted trailing earnings. If I use the first quarter as the run rate, MU is trading at 16.7 times earnings. The market is trading at 2.6 times book and 18.6 times earnings. Thus, at best, MU is fairly valued. The accumulation level is 2.1 times book value.