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Summary

  • The shares of Micron Technology have run up some 6% since the company posted a very solid quarterly earnings report two weeks ago.
  • However, this rise has run behind upward earnings revisions since those quarterly results were posted.
  • Even with the huge rise in the shares over the past year, the shares are cheap given its earnings power and the positive changes in the DRAM space.

Two weeks ago I wrote a positive piece on the investment case on Micron Technology (NASDAQ:MU) after it posted a well-received earnings report. The shares are up some 6% since that piece ran but I still feel significant upside lies ahead.

Several predictable positive catalysts have occurred since my article which should help enable additional capital appreciation in the second half of the year. First, as expected, consensus analysts' estimates have gone up significantly since that quarterly earnings report. The FY2014 estimate has risen from $3.02 a share prior to results to a current $3.21 a share. The FY2015 estimate has gone from $3.05 a share to $3.45 a share over the same time span. The rise in the estimate for FY2015 is much steeper than the corresponding move in the stock over the past two weeks which bodes well for the shares' rally to continue.

Predictably, the earnings report garnered some analyst upgrades and price targets as well. Most impressively Credit Suisse, which raised its price target on Micron all the way to $50 a share in June, which I cited in my previous article, has now just put Micron on its Focus list. The analyst firm cites the stock's low valuation and "sees new products and margin expansion" driving future EPS growth.

More importantly, Samsung has recently said it was going to soon raise DRAM prices some 10% as reported in a Digitimes report. As noted in previous article, the DRAM market is now an oligopoly dominated by just three firms, including Micron. This is not the same industry it was years ago with myriad firms fighting over the scraps and engaging in destructive pricing behavior. Samsung's move hints at the continued pricing discipline and significant demand in this space currently.

This obviously should be good for Micron's earnings and margins. The same piece speculated that prices for the mainstay 4Gb DDR3 DRAM chips used for devices like PCs could rise to $4.60 a piece in Q3 from a current level of ~$4.25. These prices had already risen some 20% in Q2. These trends point to the fact that the industry is not as cyclical as it used to be. A fact that should eventually be awarded with a higher earnings multiple in the market for Micron.

Speaking of earnings multiples, with the last upward earnings revisions for FY2014 & FY2015, Micron is selling at just 10.5 times forward earnings and under ten times projected earnings for next year. The overall market is trading at 15-16 times forward earnings. I expect this multiple discount to be eroded favorably for Micron as the company continues to deliver the results like those of the last quarter.

Yes, the shares have risen more than 125% over the last year. However, the shares have not outrun their underlying earnings which have also strengthened substantially over the same time frame. At under $34 a share, the stock would have to gain another ~50% to meet some analyst price targets. I don't think we will get there by the end of the year but a 10% to 20% gain over the next six months seems entirely reasonable. BUY

Disclosure: The author is long MU. 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.

Source: Still Upside Ahead For Micron