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Summary

  • Revenue and EPS estimate revisions continue to be positive.
  • MU currently sports 7%-8% free-cash-flow yield.
  • Internal intrinsic value estimate near $40 per share.

Micron Technology (MU), the commodity DRAM producer that looks to have formidably reshaped its business with the Elpida acquisition, reports its fiscal Q2 '14 financial results after the bell on Thursday, April 3, 2014.

Analyst consensus for the quarter is currently expecting $0.74 in earnings per share (EPS) on $3.975 billion in revenue for expected year-over-year (y/y) growth of well - a lot - since 2013's fiscal Q2 was a loss of $0.28 per share, and 91% revenue growth.

While both growth rates look quite heady, the fact is MU isn't telling us how much is organic, i.e., ex the Elpida acquisition, which is distorting the number, particularly the revenue number.

The important metrics from last quarter were the $800-$900 million of free-cash-flow and the huge EPS beat of $0.77 versus the consensus coming into the report of $0.44.

MU put up an operating margin last quarter of 13.6% and a gross profit margin of nearly 32%, both more than double the prior year's Q1.

The recent Japanese earthquake drew some brief negative comments and the potential for negative implications, but the stock has held in like a rock with the recent market turmoil, and is still trading within 10% of the recent 52-week high.

What impresses us the most is the cash-flow statement, however:

Statement of Cash Flows11/13 Q18/13 Q45/13 Q32/13 Q211/12 Q108/12 Q405/12 Q303/12 Q212/11 Q109/11 Q406/11 Q303/11 Q212/10 Q109/10 Q406/10 Q303/10 Q212/09 Q109/09 Q406/09 Q3
Cash provided by ops$1,507$481$624$470$236$529$529$529$529$621$621$621$621$774$774$774$774$302$302
Cash provided by investing$21$97($171)($999)($639)($578)($578)($578)($578)($550)($550)($550)($550)($112)($112)($112)($112)($169)($169)
Cash provided by financing($735)$219($74)$131$46$124$124$124$124($259)($259)($259)($259)($305)($305)($305)($305)($73)($73)
Net change in cash$793$797$379($398)($357)$75$75$75$75($188)($188)($188)($188)$357$357$357$357$61$61
Cash generated from oper.$1,507$481$624$470$236$529$529$529$529$621$621$621$621$774$774$774$774$302$302
Capex (incl pymts on eq purch cont)($526)($118)($235)($353)($538)($372)($324)($429)($746)($928)($534)($840)($570)($154)($154)($154)($154)($122)($122)
cash generated from stk optns$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0
Dividends$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0$0
Free-cash-flow$981$363$389$117($302)$157$205$100($218)($307)$87($219)$51$620$620$620$620$180$180
4q trailing CFO$3,082$1,811$1,859$1,763$1,822$2,114$2,207$2,299$2,392$2,484$2,637$2,790$2,943$3,096$2,624$2,151$1,679$1,206$1,159
4q trailing CFO yoy gro rate69%-14%-16%-23%-24%-15%-16%-18%-19%-20%1%30%75%157%126%#DIV/0!
4q trail capex$1,232$1,244$1,498$1,587$1,663$1,871$2,427$2,637$3,048$2,872$2,098$1,718$1,032$616$584$552$520$488$998
y/y growth-26%-34%-38%-40%-45%-35%16%53%195%366%259%211%98%26%-41%
capex as % of revenues
capex as % of cash-flow40%69%81%90%91%89%110%115%127%116%80%62%35%20%22%26%31%40%86%
4q trailing FCF$1,850$567$361$176$159$243($221)($338)($657)($388)$539$1,072$1,911$2,480$2,040$1,599$1,159$718$161
4q trailing FCF gro rate1067%133%
FCF yield8%3%3%2%

In fiscal Q1 '14, MU generated $1.5 bl in cash from operations, which hasn't been seen in quite some time at MU, even if you look all the way back the halcyon days of late 1999, early 2000.

In addition if you look at the above table, not only is MU generating better cash-flow, but its capex is falling, hence the nearly $1 billion in free-cash-flow for last quarter.

It might be too early to tell, but semiconductor manufacturing is a business with a high degree of operating leverage. Perhaps it can leverage Elpida's facilities better, or perhaps mobile DRAM is less intensive than PC or non-mobile DRAM, but better cash-flow with lower capex and a better ability to maintain ASP erosion with bit growth is a winning ticket for this company and sector.

February '14 DRAM pricing was flat, while NAND pricing was a little weaker, however, neither condition seemed to impact the EPS and revenue estimate revisions, as the following tables show:

Trends in consensus revenue estimates for MU:

FY '13FY '14y/y groFY '15y/y gro
Current$9.0 (NYSE:ACT)$16.078%$16.634%
Feb '14$9.0$16.078%$16.634%
Oct '13$9.0$15.1368%$15.865%
July '13$8.7$10.521%$11.186.5%
Apr '13$8.59$10.016%$10.555.5%
Jan '13$8.15$9.820%$10.8611%
Dec '12$8.1 bl$9.78 bl21%$11.02 bl13%


Trends in consensus EPS estimates for MU:

FY '13FY '14y/y groFY '15y/y gro
Current$-0.18$2.14 $2.9638%
Feb '14$-0.18$2.14 $2.5419%
Oct '13$-0.18$2.04 $2.2410%
July '13$-0.27$0.98 $1.2326%
Apr '13$-0.44$0.65 $1.0765%
Jan '13$-0.54$0.51 $0.8872%
Dec '12$-0.54$0.49 $0.8573%

While the revenue growth has tempered for 2015 for MU, you can see how the better margins resulted in higher EPS numbers for 2015 after the q1 '14 results were reported in late December '13 or early January '14.

In terms of intrinsic value, Morningstar still has a "fair value" on MU of $12 per share, while our internal, more earnings-based model carries a $41 intrinsic value estimate currently.

I can see how Morningstar still has a fair value on the stock that low, given the overcapacity swings that we've seen in this sector through the years.

However given MU's free-cash-flow generation, and the current 8% free-cash-flow yield, we feel much better about the potential for MU to trade into the mid $30s, low $40s before this cycle is over.

As corroborating technical evidence for MU's decent price action of late, SanDisk (NASDAQ:SNDK) recently traded above its January '06 high of $79 and change, which indicates that NAND pricing and NAND flash likely remains of limited supply. NAND is 20% of MU's revenues and 18% of MU's operating income.

There is no question, we like MU better with that kind of cash-flow and free-cash-flow generation we saw in Q1 '14. The positive estimate revisions tell us that Street analysts still like the supply and pricing environment as well.

Our recent articles on MU are here and here. MU is changing its stripes, but we really don't know how cash flow and earnings will be impacted until we see the next flush of supply or the next down cycle.

Source: Micron Earnings Preview: Estimate Revisions Positive With 8% FCF Yield