Seeking Alpha
, Portfolio123 (2,328 clicks)
Long only, value, research analyst, dividend investing
Profile| Send Message|
( followers)  

Summary

  • Micron will benefit from favorable market conditions for the DRAM and the NAND memories for the long term.
  • MU's stock is ranked first among all S&P 500 tech stocks according to Portfolio123's "All-Stars: Zweig" powerful ranking system.
  • Micron has compelling valuation metrics and very strong earnings growth prospects; its extremely low PEG ratio of 0.50 is the second lowest among all S&P 500 tech stocks.

Micron Technology Inc. (NASDAQ:MU) stock has surged strongly since the start of 2013. In fact, its relative strength index (RSI) technical indicator is indicating overbought conditions. Since the beginning of the year MU's stock has gained 54.4% while the S&P 500 index has increased 7.0%, and the Nasdaq Composite Index has risen 6.3%. Moreover, since the start of 2013 MU's stock has gained an astounding 429.8% while the S&P 500 index has increased 38.6%, and the Nasdaq Composite Index has risen 47.1%. Nevertheless, in my opinion, MU's stock still has plenty of room to move up, because it has compelling valuation metrics and very strong earnings growth prospects, and because of favorable market conditions for the DRAM and the NAND memories for the long term.

The company

Micron is the largest U.S. memory company and a leading global supplier of DRAM, NOR and NAND memory. The company provides memory solutions for computing, communications, consumer, and industrial applications, and serves both wireless and embedded applications. Micron Technology, Inc. was founded in 1978 and is headquartered in Boise, Idaho.

Valuation Metrics

The table below presents the valuation metrics of MU, the data were taken from Yahoo Finance and finviz.com.

Micron's valuation metrics are excellent; the trailing P/E is very low at 11.05, and the Enterprise Value/EBITDA ratio is also very low at 7.64. According to Yahoo Finance, MU's next financial year forward P/E is very low at 9.74 and the average annual earnings growth estimates for the next 5 years is very high at 19.63%, these give an extremely low PEG ratio of 0.50. Only Lam Research (NASDAQ:LRCX) among all S&P 500 tech stocks has a lower PEG ratio (see my recent articles about LRCX). The PEG Ratio - price/earnings to growth ratio is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

Latest Quarter Results

On June 23, Micron reported its third-quarter fiscal 2014 financial results, which beat EPS expectations by $0.09 (12.9%) and beat on revenues.

Revenues for the third quarter of fiscal 2014 were $3.98 billion and were 3 percent lower compared to the second quarter of fiscal 2014 and 72 percent higher compared to the third quarter of fiscal 2013. On a GAAP basis, net income attributable to Micron shareholders for the third quarter of fiscal 2014 was $806 million, or $0.68 per diluted share, compared to net income of $731 million, or $0.61 per diluted share, for the second quarter of fiscal 2014 and net income of $43 million, or $0.04 per diluted share, for the third quarter of fiscal 2013. Non-GAAP Income and Per Share Data - On a non-GAAP basis, net income attributable to Micron shareholders for the third quarter of fiscal 2014 was $913 million, or $0.79 per diluted share, compared to net income of $989 million, or $0.85 per diluted share, for the second quarter of fiscal 2014.

Competitors and Group Comparison

According to Micron, it faces intense competition in the semiconductor memory market from a number of companies, including Samsung Electronics Co. Ltd. (OTC:SSNLF).; SanDisk Corporation (NASDAQ:SNDK); SK Hynix, Inc. (OTC:HXSCL); Spansion Inc. (NYSE:CODE), and Toshiba Corporation (OTCPK:TOSYY).

A comparison of key fundamental data between Micron and its main competitors is shown in the table below.

Source: Yahoo Finance, finviz.com

Micron's valuation metrics are better than those of its main competitors. MU has the lowest EV/EBITDA ratio, the lowest forward P/E ratio, and by far the lowest PEG ratio among the group.

Micron's Growth Rates parameters have been much better than its industry median, its sector median and the S&P 500 median, as shown in the table below.

(click to enlarge)

Source: Portfolio123

Technical Analysis

The charts below give some technical analysis information.

(click to enlarge)

Chart: finviz.com

The MU stock price is 3.04% above its 20-day simple moving average, 12.64% above its 50-day simple moving average and 41.04% above its 200-day simple moving average. That indicates a strong short-term, mid-term and long-term uptrend.

(click to enlarge)

Chart: TradeStation Group, Inc.

The weekly MACD histogram, a particularly valuable indicator by technicians, is at 0.50 and descending, which is a neutral signal (a rising MACD histogram and crossing the zero line from below is considered an extremely bullish signal). The RSI oscillator is at 74.70 which indicate overbought conditions.

Ranking

According to Portfolio123's "All-Stars: Zweig" powerful ranking system MU's stock is ranked first among all S&P 500 tech stocks.

The "All-Stars: Zweig" ranking system is quite complex, and it is taking into account many factors like; EPS Growth, Sales Growth, Market Performance and Insider activity, as shown in the Portfolio123's chart below.

Source: Portfolio123

Analyst Opinion

Many analysts are covering the stock, but their opinion is extremely divided. Among the 32 analysts 11 rate it as a Strong Buy, 11 rate it as a Buy, 8 rate it as a Hold, one rates it as an Underperform, and one-analyst rates it as a Sell.

TipRanks is a website that ranks experts (analysts and bloggers) according to their performance. According to TipRanks, among the analysts covering MU stock there are 19 analysts who have the four or five star rating, 15 of them recommend the stock, three analysts have a Hold rating on the stock, and one-analyst rates it as a Sell.

On June 24, Piper Jaffray's analyst Ruben Roy reiterated an Overweight rating on Micron Technology and raised his price target to $41.00 (from $39.00) following solid F3Q14 earnings and a continued strong outlook through 2015. Mr. Roy explained: "While pricing and mix likely lead to a dip in gross margins (est. 110bps q/q) in F4Q14, we think margins can recover in FY15 as greater mix of SSDs, transition to 16nm and TLC memory and the move to 3D NAND start to yield better margin structure while bits continue grow. MU's bit outlook for NAND (+40% in 2015) and DRAM (Mid 20s% growth in 2015) remains intact." I consider Mr. Roy's analysis very valuable, since he has 5-Star rating from TipRanks for the accuracy of his previous calls.

(click to enlarge)

Source: TipRanks

Major Developments

DRAM sales products were 48%, 39% and 41% of Micron's total net sales in 2013, 2012 and 2011, respectively. According to Gartner, DRAM is responsible for the growth in the chip market this year, and is expected to lead with a 18.8 percent annual growth. This is because DRAM pricing remains firm, and coupled with growth in key system markets, this is helping propel the DRAM market to an estimated $41bn in 2014. Gartner, Inc. (NYSE:IT) is the world's leading information technology research and advisory company.

NAND Flash sales were 40%, 44% and 36% of Micron's total net sales in 2013, 2012 and 2011, respectively. TechNavio's analysts forecast the Global Mobile NAND Flash Memory market to grow at a CAGR of 18.8 percent over the period 2013-2018. One of the key factors contributing to this market growth is the high demand for smartphones across the globe. TechNavio is a leading technology research and advisory company.

According to Micron, the DRAM market is expected to grow in the 20%-30% range annually, and the NAND market is expected to grow in the 30%-40% range annually for the long term.

These favorable market conditions will benefit Micron and should enable the company to continue to grow and to improve margins.

Conclusion

As the largest U.S. memory company, Micron will benefit from favorable market conditions for the DRAM and the NAND memories for the long term. Micron has compelling valuation metrics and strong earnings growth prospects; it has an extremely low PEG ratio of 0.50, only LRCX among S&P 500 tech stocks have a lower PEG ratio. Furthermore, MU's stock is ranked first among all S&P 500 tech stocks according to Portfolio123's "All-Stars: Zweig" powerful ranking system. All these factors bring me to the conclusion that MU stock is a buy right now.

Source: Despite The Amazing Surge In Its Stock Price, Microns Is Still A Buy