We thought we'd kill two birds with one stone today and give short, sweet summaries of Alcoa's (NYSE:AA) and Micron's (NASDAQ:MU) recent quarterly results and what we think the rest of the year holds for both stocks.
Going in alphabetical order:
Alcoa reported their first calendar quarter of 2014 on Tuesday night, beating EPS handily but missing slightly on revenues. The downstream businesses continue to improve margins and profitability as the smelting (upstream) business continues to shutter capacity.
1.) Margins expanded and the EPS revisions for the rest of 2014 were positive, even though analyst consensus slightly dropped the forward revenue estimates. That is a sure sign analysts as a group are looking for better margins when EPS revisions are higher but revenue revisions are lower;
2.) After y/y EPS have declined for 10 consecutive quarters, in q2 '14 EPS will start growing y/y again. No doubt the stock is reacting to this.
3.) Full year EPS growth for AA jumped from an expected 3% for 2014 as of 12/31/13's results to 24% expected y/y growth for 2014 as of 3/31/14's results;
4.) Operating income improved in all 4 segments sequentially, the downstream businesses are still on fire, and Klaus Kleinfeld is lowering the cost structure in the smelting business to make it more competitive;
1.) While regional premia's are improving, aluminum pricing is still punk and there continues to be a heated debate on where the supply demand imbalance is for the aluminum business;
2.) Shuttering additional capacity as Alcoa did in March / April is a sign that the upstream business is still oversupplied;
3.) Didn't like the weak cash-flow and free-cash-flow, both negative, but Alcoa said there was a need for working capital which should come out in forward quarters;
Conclusion: We have trimmed a little of the stock, and the stock is trading closer to fair value of $15 - $17, but there is likely more upside ahead with the positive EPS revisions. Street analysts talk about the 31(x) P/E for 2014, but EPS expected growth now is 24%, not 3%. A 31(x) PE on 24% expected growth is still very reasonable.
We still own the lion's share of our position, but have trimmed some where it was too big a percentage in client accounts.
Micron also reported a good quarter, but guidance for NAND pricing was a little weaker than expected;
1.) Like Alcoa, MU's EPS estimates for 2014 and beyond were revised higher while forward revenue estimates were taken lower. That tells me that margins continue to expand, or are expected to continue to expand for MU through 2014 (at least);
2.) The EPS and revenue beat were strong once again, handily beating analyst estimates;
3.) MU's operating margin jumped to 21.5% in q2 '14, a very good sign;
4.) Continued strong improvement in cash-flow and free-cash flow. MU sports a 9% free-cash-flow yield now, with a $23 market price;
5.) Like the balance sheet cash too and long-term debt hasn't unchanged;
6.) Forward EPS revisions were sharply higher post the q2 '14 earnings release;
1.) Guidance on q2 and 'fiscal '14 NAND and DRAM pricing was a little more severe than expected at 7% and 15% declines sequentially. (That could be a positive though if MU UPODs (under promises and over delivers);
2.) Micron could still be Micron which is perhaps why Morningstar didn't change MU's intrinsic value estimate of $12 per share. There are a lot of investors out there that wonder if MU's stripes have really changed. Our intrinsic value estimate only changed from $41 to $37 after this report, which means our model still has the stock at a significant discount to fair or intrinsic value.
IF MU really is a different company and the cash-flow, and free-cash-flow are excellent as is the cash position, then MU will tell us that by at some point declaring a dividend. That will be the key tell if we are to believe MU has moved from a serial capital destroyer in down markets to a company that can maintain free-cash-flow even in an oversupplied market, and thus reward shareholders.
That could be a tough hurdle, and that is just my opinion;
Of the two stocks we give Alcoa the slight edge and the stock we'd buy first for 2014 since it fits a number of themes working in 2014 so far:
1.) The value over growth theme;
2.) The commodity theme;
3.) The selling of 2013's winners and buying of '13's under-performers;
MU can be thought to be a commodity value company as well, but 2013's return and outperformance leaves it with 2 out of the 3 criteria, while Alcoa meets all 3.
We own both stocks and will continue to give the valuation and the change in EPS estimates.
Disclosure: I am long AA, 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.