Micron: It's The Cash Flow Stupid

Apr. 4.14 | About: Micron Technology (MU)

Summary

2Q non-GAAP eps of $0.85 was a nice beat over "consensus" which had risen from $0.61 to $0.76 over the past couple of weeks. $4.1 billion revenue also a beat.

Management sounds completely uninspired on their calls. Lack of an earnings calendar or any normal guidance doesn't inspire confidence in institutional investors.

Cash flow is great!

Micron Technology (NASDAQ:MU) mumbled through their earnings call on April 3 conveying numbers which were actually quite nice. Wall St analysts didn't liven things up much asking largely irrelevant or inconsequential questions. They sounded quite bored as well.

What was tremendously exciting was the company's large and improving cash flow. Of course this got little headline attention from management in their presentation and almost no questions from the analyst community.

Here's what the back of my cocktail napkin looks like, for EBITDA:

6 months operating income $1.42 billion
6 months depreciation $1.031 billion
= 6 months EBITDA $2.451 billion
times 2 x 2
annualized EBITDA $4.902 billion
Click to enlarge

and here's what the enterprise value looks like:

Equity cap, per Yahoo $25.45 billion
Plus: LT Debt $4.37 billion
Less: Cash + marketable securities $(5.06) billion
Total Enterprise Value $24.76 billion
Click to enlarge

so the magic multiple of $24.76 billion of Enterprise Value divided by $4.902 billion of EBITDA is a mere 5.05x. (The multiple plunges to 4.0x if you use Credit Suisse's full-year estimated EBITDA of $6.196 billion. See their report of 3/31/2014 which I found online.) Now that is a mighty low multiple. This is the sort of multiple LBO shops look for as a sanity test when screening targets. This is the sort of number which allows a takeover premium and you still have an LBO or buyout which works. Alternatively, you have a company which can easily go raise enough straight debt (I heard Ron Foster mention the phrase at least twice!) to retire their converts today. This is the kind of multiple that should allow stock dividends and share repurchases in the not too distant future.

Now purists will choke on me doubling the first half to get to an annualized number. I would counter that I expect cash flow to get better in the second half as the Singapore DRAM to NAND conversion is behind us and as node shrinks in both NAND and DRAM are a bit more behind us. I'd also point out that about a billion dollars worth of debt and the $250mm deposit are not interest bearing and should probably be accorded some discount in an enterprise value calculation.

Conclusion. Micron needs to grow up and think a bit more like their audience of institutional investors. One can bet that dozens of portfolio managers have done the same calculation (and we will hear from them if I've muffed something here!). Management needs to convey some excitement and pride in a company with multiples like these, or perhaps Greenlight and Baupost and others will find a new management. CFO Ron Foster needs to be retired right away for having spent almost a billion of our dollars on Elpida hedges and his disastrously dilutive convertible issuances, redemptions, and exchanges. And the company needs to at least publish an earnings calendar and stick to it. If they don't know what guidance looks like, they should study up on Intel (NASDAQ:INTC) and SanDisk (SNDK) who have equally complicated and competitive businesses but do a much better job on earnings guidance.

We've just had another very respectable quarter obscured by management mumbling and poor questions from analysts. Oh well, many of you will say. That will keep values depressed a bit longer for us long term believers. I'd like to let the light shine out from under our bushel but suspect acquirers or activist institutions may force that to happen, given a truly great cash flow.

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.