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Summary

  • Micron Technologies once again delivered solid earnings results and guidance after the bell on Monday.
  • Analysts are coming around to realizing how the fundamentals of this sector have changed over the years and see much higher upside ahead.
  • Even after rallying by a third so far in 2014, the shares are still very cheap compared to the overall market.

Micron Technologies (NASDAQ:MU) delivered stellar results after the bell on Monday. The company posted earnings of 79 cents a share, significantly above the 70 cent a share consensus. Thanks primarily to last summer's acquisition of Elpida, which filed for bankruptcy in February of 2012, revenues surged over 70% year-over-year to $3.98 billion. This was $90 million above expectations. Micron also provided solid forward guidance, calling for revenue of $4B-$4.2B next quarter versus a $4.06B consensus.

My regular readers on Seeking Alpha and Real Money Pro know that I became a buyer on Micron a few weeks ago. Part of my newfound enthusiasm for the stock was triggered by Intel's (NASDAQ:INTC) great quarter and upwardly revised guidance on June 12th.

More importantly, the landscape for Micron's core DRAM market has changed drastically over the years. Not too long ago, there were myriad players in the market. This made pricing discipline very hard to maintain and led to constant boom and bust cycles. Due to the volatility of the business, stocks in this sector were awarded a very low multiple on peak earnings.

However, over the years, the industry has consolidated, and Micron's acquisition of Elpida left three major players in this market. Obviously, this has led to better pricing discipline, margins, and should also elongate the earnings cycle.

This can be seen in Micron's performance since its purchase of Elpida. The company has easily beat bottom line expectations by a good margin in four of the last five quarters. Prior to the purchase, Micron had missed the consensus for at least eight straight quarters. We are in the early innings of this increased performance, in my opinion, and the train is leaving the station.

This belief is starting to be shared by analysts, and this could be a positive catalyst for continued capital appreciation. Prior to earnings, both Drexel Hamilton and Credit Suisse moved their price targets on Micron from $30 a share to $50 a share. Needham came out this morning and made the same exact price target revision.

Even with its recent move, the stock of Micron is selling for just under $32 a share. This is more than a 50% upside to get to three recent analyst price targets. The stock is selling for right at 10 times forward earnings, when the overall market multiple is around 15 times.

The shares also have a minute five-year projected PEG (.51). I would also expect earnings estimates to be taken up over the next week or so on the back of this earnings report. This locomotive is gaining steam, and continues to be a good value in what I believe is a slightly overvalued market. BUY

Source: Micron: The Train Is Leaving The Station