When a company sees the price of its stock increase by 135% in just twelve months (at a pace far outclipping the S&P 500's 25% returns over the period), it could be a worthwhile exercise to at least pause and ask: Has the price of this stock gotten ahead of itself?
That is the situation Micron Technology (NASDAQ:MU) investors have found themselves in, and most interestingly, the price of the stock seems justified by the fundamentals and does not appear to be overvalued, despite the significant success seen in the price of the stock over the past year.
Because earnings per share comparisons do not make sense for a company with Micron's capital investment needs (e.g. there's not a whole lot you can glean from the fact that Micron went from generating -$1.04 per share in 2012 before switching substantially into positive territory to generate $1.13 in 2013), a more accurate measure of the company's business success can be found by looking at the cash flow thrown off by manufacturing semiconductor components and devices.
That figure is much more illuminating: the cash flow generated per share grew from $1.17 in 2012 to $2.96 in 2013, and is expected to be at $5.40 by the end of 2014. Looking at these figures is important so that you don't fall into the trap of saying, "Oh, gee, this stock increased 135% in the past year, therefore it must be overvalued by definition." No, the second step of the analysis requires you to ask: Are the cash flow increases generated by Micron approximately in line with the ascendant stock price?
Well, the cash flow per share increased 153% for 2013, and by the end of 2014, that figure is expected to rise another 82%. I'm not bothered by the fact that Micron's stock is up 135% compared to where it was last year, because the company is on pace for 360% total cash flow growth from 2012 through 2014. The fundamentals back it up; buying Micron in 2014 is supported by a cash flow figure that has grown by more than the stock price, and that is what ought to be the concern of long-term investors.
From a cash flow perspective, what I find so intriguing about Micron is this: sales have been increasing sharply, and overall, margins have not declined. In 2012, Micron registered $8.7 billion in sales. In 2013, it registered $8.2 billion. In 2013, that figure perked up a bit, to $9.0 billion. But 2014 marked a substantial shift, as sales are expected to cross the $16 billion threshold by the end of this year.
Usually, when you see increases in sales like that, you have a concern that margins will decrease. That hasn't been the case with Micron, and should be a source of optimism for its long-term future. Operating margins, which vacillated in the 20-28% range from 2011 through 2013, are expected to be in the 38-39% range this year (in fact, DRAM margins are actually improving).
Furthermore, this significant uptick in profitability at Micron makes its debt load become much more manageable. With $5.6 billion in debt ($3.6 billion of which is not due until 2019 or later), this kind of balance sheet may have been a concern in 2012 when Micron was reporting net losses. It might have been a small blemish last year when Micron was making $1.1 billion. But now that Micron is slated to make well over $2 billion this year in net profits, the balance sheet is not much of a concern for long-term investors.
What I really like about Micron is the steady commitment to research and development. In 2013, Micron spent over $900 million for research purposes, and it is refreshing to study a company that doesn't try to bolster short-term profits by gutting out its research commitment. Capital spending per share, which came in at $1.13 per share in 2013, is expected to cross the $3 threshold by the end of this year. I like that Micron is able to increase its profits substantially while maintaining its commitment to its long-term future.
I understand that it is currently fashionable to take a superficial look at Micron, note the 135% price increase in the past year (heck, even Regis Philbin got in on the Micron action somewhere along the way), and immediately declare that it must be overvalued. I don't reach that conclusion because: (1) cash flow per share has increased at a rate greater than the stock price, and (2) despite sales figures for 2014 that are expected to be double the 2012 figures, Micron has actually managed to improve its operating margins. Put succinctly, the business performance has more than justified the price increase, and that is why concerns about overvaluation seem farfetched based on current business performance.
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.