Micron In March: Miracle Or Madness?

| About: Micron Technology (MU)

Will Micron (NASDAQ:MU) stock experience a March miracle or March madness? I'll provide my thoughts on both theories.

March Madness Theory

The March Madness theory says that Micron has finished its huge run-up and will drop to $20 or lower by the end of the month. Earnings will be below analysts' consensus of around $0.61. This theory looks back at the cyclical nature of Micron and memory, and according to the cycles of highs and lows, Micron is going to head down. Memory spot prices are dropping, and when memory spot prices have dropped in the past, Micron earnings have dropped.

Others can expand on this Micron March Madness theory. I have a hard time explaining it because I don't see many facts to support the theory.

March Miracle Theory

The Micron March Miracle theory says that Micron is just starting its recovery, it is well positioned in an expanding industry (Micron: Memory for the Gold Rush) and earnings will continue to grow for the next few years at least. Like last quarter the next earnings will blow away the analysts' average estimate of $0.60 and even the highest analysts' estimate of $0.80. Seeking Alpha contributors Russ Fischer, Jaret Wilson, Wilson Wang, Retired Securities Attorney and Electric Phred have all concluded that Micron earnings to be announced in late March or early April will be between $0.90 and $1.10.

These estimates are based on actual pricing of memory that Micron is selling and guidance provided by Micron management in their January earnings report. At last earnings, the analysts' average was $0.53 and Micron announced earnings of $0.77. This blowout was even without the benefits of higher memory pricing that occurred after the end of the reported quarter, with substantial one-time expenses accounted for during the quarter and without the full impact of the benefits associated with the recent purchase of Elpida.

Micron management has provided accurate information on which to base calculations of earnings. The guidance does take some background knowledge, and SA contributors related to Micron as listed above have proven their ability to use the sketchy guidance provided by Micron to accurately estimate earnings. They were right on target last quarter and I expect the same this quarter.

Stock Price Based on Earnings

There are several approaches that provide a range of Micron stock prices. I use the simple approach:

PEx of 8.6: This PEx was provided by Micron as analysts' view of the Micron PEx.

Applied to earnings of $0.61 (X 4 quarters) results in a stock price of $21.

Applied to earnings of $0.90 (X 4 quarters) results in a stock price of $31.

Applied to earnings of $1.10 (X 4 quarters) results in a stock price of $38.

Note: I simply multiplied the quarterly earnings times four to reflect that earnings are increasing each quarter. If you think that earnings are going to decrease, then a different approach is needed.

Just for fun, let's apply the SanDisk PEx of 11.9 as calculated by analysts. The three stock price estimates above then become: $29, $43 and $52, respectively. Micron will not be able to reach these prices until it accomplishes its goals of buying down its debt and providing a long-term stable track record for analysts to use in their calculations.

In my February 10, 2014 article I describe the various factors that will prevent Micron from reaching $40 before the January 2015 earnings report.

Micron Stock Price in March

Hey, what's up with Micron's stock price over the last week? As with lots of lots of slang these days, often the new meaning of the word has nothing to do with the original. I was once told by my son's friend that my snowboard pants were "tight". They were extremely baggy so he thought they were cool - like "tight". So why is Micron down this last week ?...and I'm not "down" with that (my portfolio dropped $130k).

Russ warned about dropping Micron stock prices between earnings. People - as in the March Madness theory group - think that Micron has gone up as much as it will and take profits making the stock price drop. Russ has seen this happen in other stocks. When higher earnings are again reported, then the stock rises. Russ has seen this happen for many quarters until the stock price finally reaches what it should be. This could correspond with a doubling or tripling of the stock price. It has happened before, and Micron is set up to experience the same roller coaster ride.

Between now and earnings, Micron stock will go up and down but probably not much below the 50-day moving average as support. This support line has been tested and proven an amazing eight times over the last 16 months. The stock will go up with good news like the Micron management statements coming out of five conferences from March 3 to March 11. The price could drop with news of hedge funds or insiders cashing in on some profits. If you earned millions after ten years of no benefits from stock options, wouldn't you cash some stock options and enjoy life?

Closing Remarks

After the late March or early April earnings report of $0.90 to $1.10, watch for Micron stock to rise to $31 to $38.

To maximize profits, cash out before mid-April and buy again before earnings in late June or early July.

Place your bets in the stock market, tell us about your bets and share your thoughts in comments...

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.