As investors raced to get off of the “cloud” last week, a funny thing happened. Micron Technology (MU-$7.59) reported an abysmal fiscal fourth quarter, complete with lower guidance, yet the stock jumped 6.8%. How could this be?
Micron is a global leader in the design and production of DRAM, NAND and NOR flash memories for computers, servers and communications devices. As expectations rose for the windows 7 upgrade cycle and the rapid growth in smartphones, Micron and competitor SanDisk (SNDK-$39.52) were among the recovery’s most stellar performers. But this summer’s correction, weaker-than-expected consumer PC sales, and fears of a double dip have colluded to offer investors a chance to buy Micron at a 27% LTM free cash flow yield. My 12-month target for Micron is $13-$15 based on 9-10X F2011 EPS estimates.
My estimates and valuations are as follows:
Revenues (bil) EPS P/E
2009A $4.803 $(2.28) na
2010A $8.482 $1.32 5.8X
2011e $9.900 $1.47 5.16X
Note: August fiscal year
These estimates may near the high end of the consensus range, but I think they could prove conservative. Moreover, valuations are cheap! A P/E ratio of 5.2X NTM earnings speaks for itself, but valuations are attractive on other metrics as well. It trades at an EV/F11 revenue multiple of .8X versus a 5 year average of 1.1X NTM Revenues. And it trades at 1.1X book value.
What makes the stock go up? First, it is just too cheap. But more importantly, expectations have been cut to levels that are too pessimistic. We know that back-to-school PC sales have been soft, and management has confirmed that tablets and smartphones have pressured PC sales. We know ASPs are dropping for both DRAM and flash. But unit costs are also coming down, and should yield a flat or even slightly higher gross margin in F2011.
But with stabilization in Europe, continued growth in Asia, and a little better consumer sentiment into Christmas, I expect PC sales to pick up into the end of the year. And the next sales and profit revisions for Micron should be to the upside.
Disclosure: Author is long MU, MU calls and SNDK calls