- The market is anticipating an earnings beat.
- Shares outstanding are growing quickly and diluting shareholders.
- Short covering is driving some of the price appreciation.
Background: Micron Technology, Inc., (NASDAQ:MU) together with its subsidiaries, engages in manufacturing and marketing semiconductor devices worldwide. The company was founded in 1978 and is headquartered in Boise, Idaho.
52-Week Range: $12.31 to $32.19
Price To Book: 3.6
Micron Technology is anticipated to report good third quarter earnings after the market close on June 23, 2014.
The consensus estimate is currently 68 cents a share, an improvement of 64 cents (1625%) from 4 cents during the same period last year.
Estimates from analysts range from a low of 49 cents per share, up to the highest estimate of 79 cents per share.
Analysts for the most part approve the direction Micron Technology is headed. Nineteen of the 32 analysts covering the company give a buy recommendation. Ten analysts rate it a hold, and 3 sell ratings. Shares have really appreciated, gaining 141% in the last year, and the average analyst target price for Micron Technology is $32.70. As I write this, Micron is trading at another 52-week high.
Several analysts shifted their opinion this month:
- Robert W. Baird upgraded its rating from Neutral to Outperform and raised the price target from $25 to $42 this week on June 16th.
- Nomura totally reversed and went from a Strong Sell to a Buy rating, and raised the price target from $30 to $40 on June 12th. Better late than never I guess.
- Bank of America (NYSE:BAC) changed its opinion from Underperform to Buy and also raised the price target from $22 to $40 on June 11th.
- Credit Suisse on the same day as Bank of America raised its price target from $30 to $50 and changed its rating from Underperform to Outperform.
While the consensus estimate is 68 cents, whisper numbers I've read range from 75 cents up to 80 cents. This is important because it means other investors are fully anticipating a significant beat. In other words, If Micron beats by five cents and reports 73 cents and lackluster guidance, you could see the shares fall.
When we evaluate the options market, specially the contracts expiring immediately following the earnings release, we are in a position to achieve a more effective comprehension of what the other traders are expecting.
Option premium tells us that the market is pricing in a 4%, or about $1.13 move, in the next 5 days.
That means, as a shareholder or potential investor, you should anticipate the stock to trade as low as $30.04, or increase to $32.30 and remain within the expected range. Make sure you're prepared for at least a $1.13 price move unless the company fails to deliver or beats by more than the whisper number, and then all bets are off. Keep in mind that guidance is everything, and last quarter's results are secondary.
Last quarter the company reported record revenue of $4.1 billion and margins improved to 34%. Micron's CEO Mark Durcan gave double-digit growth guidance during the last conference call for 2015 and beyond. There's no question based on analyst upgrades and the stock chart moving from the bottom left to the upper right that the market believes it.
The options are pricing in about the same move as last quarter. After announcing earnings on April 3rd, the shares climbed about 3.3% to close near the high at $24.79. It wasn't a smooth ride higher as the range went from $22.44 up to $24.85. So if the numbers are good, don't be quick to let the market shake you out of your position.
I'm concerned about the rapid growth in shares outstanding. Increasing the number of shares dilutes shareholders and creates a headwind for per share revenue and profit. If shares outstanding increase faster than profits, the price-to-earnings multiple will climb even though profits are growing.
I'm also scratching my head with the recent price action in relation to the short interest. The last reported short interest is 10.3%. That's huge by any standard and it's falling. Some of the share appreciation results from squeezed short sellers and their covering.
Short sellers have to buy shares to exit their position, and that can cause a rapid rise in price. The short interest is at its lowest level in more than six months. Also, since short interest reporting is always outdated, it's a reasonable bet to assume the last two or three weeks is heavily influenced by short covering.
What does that mean? I suggest either selling calls to hedge against downside risk or take some money off the table and collect at least some profit.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.