- Micron is experiencing healthy net sales growth and expanding margins.
- There lies opportunity for economies of scale in SG&A and R&D expenses.
- I expect a blowout quarterly earnings report for Monday.
Micron Technology, Inc. (NASDAQ:MU) is one of the leading providers of advanced semiconductors. The company manufactures DRAM (Dynamic Random Access Memory), NAND Flash and NOR Flash memory and other memory technologies. Micron's major product portfolio is as follows:
- DRAM (48% of 2013 revenue) - Provides high speed data storage and retrieval. DRAM products are used in computers, mobile phones, computer equipment, servers, and industrial and automotive devices.
- NAND Flash Memory (40% of 2013 revenue) - NAND Flash products are electronically re-writeable semiconductor memory devices that retain content when power is turned off. NAND Flash-based storage devices are utilized in mobile phones, computers, and industrial and automotive applications. This product group also includes removable storage devices, such as USB and Flash memory cards.
- NOR Flash Memory (9% of 2013 revenue) - NOR Flash products are electronically re-writeable memory devices that offer fast read times due to random access capability and execute-in-place capability that enables processors to read NOR Flash without first accessing RAM.
Historical Financial Performance
Below are Micron's historical financial results:
- Net sales grew from $8.9 billion in 2011 to $11.1 billion through last 12 months February 2014 ("LTM0214").
- Net sales were higher due primarily to higher levels of DRAM and NAND Flash gigabit sales volumes.
- Gross margin percentage improved from 20% in 2011 to 26% through LTM2014 due to cost reductions from improvements in product and process technologies.
- SG&A and research & development costs grew with revenue, totaling approximately 16%, 19%, 16% and 16% of net sales for 2011, 2012, 2013 and LTM0214, respectively.
- This would imply that [i] Micron has been plowing profits into R&D for new products and improvements over existing products and [ii] there is no leverage in its sales and administrative functions. There may be opportunities for efficiency gains in SG&A costs.
- As revenue has grown and margins expanded, the company's operating income and net income has demonstrated hyper-growth. Such growth may not tamp down as long as sale volume continues.
- Jim Cramer expects management to shoots the lights out when it reports earnings today.
This is where things get rather interesting. Micron has a market capitalization of $34.1 billion. However, there is a lot of noise within its financial report, such as "gain on the acquisition of Elpida Memory, Inc," non-operating expenses and an extremely low provision for taxes. I tried to mute the "noise" in order to come up with a valuation based on LTM0214 financial results:
[i] Micron's operating income through LTM0214 was approximately $1.128 billion.
[ii] Less: Interest expense of $241 million
[iii] Generates core pretax income was $887 million
[iv] Core after tax income (40% tax rate) equals $532 million
[v] Add: Net income from investees of $109 million
[vi] Add: Net loss attributable to controlling interests of $12 million
[vii] Results in total after-tax income of $629 million.
That's a long-winded way of saying that Micron is currently trading around 54x total earnings of $629 million and 64x core operating earnings of $532 million. Again, core operating earnings were taxed at 40%, and do not put a multiple on any provision for taxes that benefit from deferred tax assets or net operating losses ("NOLs"). These multiples are still more than adequate given that the company's past and expected earnings growth rate far exceeds its earnings multiple.
Micron is set to announce its quarterly earnings today after the market closes. I expect management to report growth in revenue and some additional leverage pursuant to SG&A costs. There is more upside ahead for Micron. This stock is a buy.
Additional disclosure: I have a long/short position with puts/calls on Micron.