This article will have a lot less numbers than is usual for me and a lot more conceptualization. It will also be shorter since my conclusions are all judgment calls and difficult to substantiate other than with my educated opinion.
Micron's (NASDAQ:MU) third quarter is in the books. $3.98 billion in sales and $913 million income make for a gross margin of 34.5%. It was a solid quarter but not spectacular. Non-GAAP earnings came in at $.79 bringing the total for three quarters to $2.41. Assuming that next quarter holds steady in the $4 to $4.2 billion range in sales, the quarter's earnings should be in the $.79 to $.86 range. That would bring 2014 EPS to between $3.20 and $3.27, less than my $3.46 projection. The reason I missed is that I misread the oligopoly's intention or its ability to hold ASPs higher. I think that is a miss in timing though, not result.
I think we will see higher ASPs, lower costs, and higher margins although I do not have a good handle on when. Actually, that is my history. I'm very good on the "what" part of projecting and almost always early on the "when" part. But that's OK because I'm an investor, not a trader, and I can afford to wait until later as long as things keep developing the way I expect them to.
My expectations have not changed much although the timing has been extended. I expected to see more price improvement this last quarter and it didn't happen. I think that is partly the result of fixed price contracts which hadn't yet expired but which will have by the end of next quarter. It's also the result of this oligopoly's failure, so far, to either realize or exercise the pricing power, which it has. The realization has probably dawned on all the members but they haven't yet acted on it. Usually, it takes a clear leader to trigger an oligopoly's choice of actions and, so far, no clear leader has emerged, as far as I can tell. The obvious choice for this role is Samsung (OTC:SSNLF). It is the largest and has the least interest in higher mobile memory prices. Micron could also emerge as the leader since it is the largest memory merchant; has product diversity; and, with its close partnership with Intel (NASDAQ:INTC), has an expansive influence in the industry belying its smaller size.
This is what I expect from now through the end of fiscal 2015, August 27, 2015. Actually, for pricing it's what I expect by the end of September 2015, when those results have been reported and digested by the market.
I expect continued growth in volume, continued lowering of costs per bit, and more price improvement than we have seen thus far. If my expectations materialize, gross margins will improve as fixed and semi-fixed costs grow more slowly than revenues. Sales contracts will gradually expire over the coming quarter and will be renewed at higher prices. No one wants to get caught without the memory they need to put into their devices in order to sell them. Sales are growing across most sub-markets at a high capitalized annual growth rate. With demand continuing to outstrip supply in mobile DRAM, SSDs, and small memory devices like wearables, and with those factors looking like a relatively long-term trend, I still expect price improvement.
More smartphones are being sold and they are being sold with increasing amounts of memory. PCs are flat but they are increasingly 64 bit machines with larger amounts of memory. SSDs are rapidly becoming more cost competitive with HDDs and we will see more computing devices of all sizes with SSDs instead of HDDs. Micron is committed to increasing SSD attachment rates by holding NAND prices down. And given the high quality and low price of its Crucial brand of SSDs, this appears to be a winning strategy.
These are long-term trends. They are not likely to reverse or even stall for very long.
So the future looks bright to me. Demand growth is still very high and outstripping supply growth.
Higher sales at prices, which hold up more than predicted, and with lower costs makes for a growth company. Micron is still priced for flat earnings. But Micron the commodity manufacturer is dead and Micron the growth company has replaced it.
So where does that take prices between now and ?
1. Risk Target. I do not see a growth company, even with a general market pullback, trading at less than 10 times earnings for very long. I do not see Micron earning less than $3.20 on a forward or trailing 12 month basis. This gives me a Risk price target of $32. That's up from $30 on March 14th. This target represents what I expect any downward price movement to be limited to in the event that things go wrong in a weak market climate. Given that that is about where it is presently trading, I do not see any material risk in owning the stock at this point.
2. Reward Target. This represents the price I am looking to get to. It's the point at which I feel that the stock has reached its then-current potential and represents the point at which I will be moving any remaining invested funds into another investment which I feel has not yet reached its potential. I often do not reach this price target. The reason that I don't is because by the time the price has gotten to that level, higher earnings are in the books and the growth story has been going on for a longer time, and is more accepted, so this target has to change to reflect those facts. When it does get there, it's because the analysts have overdone it and the market players are too giddy about everything. As with every other projection, it's a continuously moving target.
This one is hard. First, in today's interest rate environment of a near zero discount rate.
If Micron shows potential realizable growth in earnings of 10% on a capitalized annual basis, I would give it a 15 PE in this environment. At a PE of 15 on $3.52 in earnings for fiscal 2015, we get a price of $52.80 a share. This is quite doable. If Micron shows potential realizable growth in earnings of 15% on a capitalized annual basis, I would give it a 20 PE in this environment. If we project $3.68 in non-GAAP earnings for fiscal 2015, we get $73.60 a share.
If interest rates are headed up from near zero at that time, the direction alone will lower these prices. How much lower will depend on how fast they are rising and what level they have reached. In a rising interest rate environment with a discount rate of 2%, I would peg those PEs at 12 and 15 respectively, giving us price targets of $43.30 and $55.20. So we can see how sensitive my price targets are to the interest rate environment.
So we have a range of potential prices fifteen months out from $43.30 to $73.60 depending on earnings growth and prevailing interest rates. I will be watching both every day.
3. Balanced Risk/Reward Target. This is the price at which I think the risk is about equal to the reward. It's basically my "hold and watch-it-like-a-hawk" price. For a newly recognized growth stock, it should be about midway between the weighted average (weighted by the probabilities) of the Risk target and the Reward target. This is the point at which I normally consider lightening up. Lightening up for me normally means going from having way too much of my net worth in a stock to only having too much in it. I'm not much for diversification and I'm inherently too much of a gambler for my own good. Actually, maybe not. I got here this way and I can afford to lose way too much of my net worth without adversely affecting my life style. I live very modestly except for my house. At this price point, I'll sell a little when it goes up, and buy some back when it goes down. This price target is now $48 for me. That's up a lot from my March target of $36. As with all my targets, it is a continuously moving target, which depends on what's going on at a given moment in time.
My Balanced Target is so much higher than it was only three months ago because my Reward target is so much higher so this target needs to be a lot higher to balance that with my Risk target.
As usual, I write Seeking Alpha articles because I learn so much from the co-operative analysis in the comments. So, please, tell me how wrong you think I am just so long as you also tell me why you think so. Also, as always, I'm sure that I made some mistakes. I always do. Please point them out to everyone.
Your mileage may vary. Mine no doubt will after I have read your comments.
Disclosure: The author is long MU, INTC. 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.
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