Thesis: MU valuation and volatility premium, coupled with a mostly upbeat sector outlook, make bullish MU option plays one of the best bets in the semiconductor space.
Profile: Micron has two segments - memory (DRAM/NAND flash memory) and Numonyx (NOR flash memory.) Its 'other' category includes imaging products. DRAM sales account for approx. 60% of FY11 sales, NAND flash about 28%, NOR flash 7%.
Intel (INTC) and Micron are close partners, with MU representing the largest position in Intel's investment portfolio.
Source: S&P Compustat Company Report (login required)
Fundamentals: MU is now trading in the $9.10-$9.30 range, with 6.5x P/E TTM and 7.5 projected forward P/E. The 52 week range is $6.36 - $11.95.
Forward PEG varies drastically from analyst to analyst, since industry pricing on memory & NAND flash is extremely difficult to predict. On the most conservative end of estimates, Micron seems on pace to deliver consistent 10% YOY revenue growth on a 5-year timeline, but optimistic assumptions lend themselves to scenarios delivering up to 50% YOY topline increases.
The company posted positive surprises (beat consensus estimates) 6 out of 8 last quarters. It's missed expectations the other two quarters, but only by slender margins.
Downside protection: P/Book is a rock-solid 1.11 vs. industry average of 4.
P/Sales stands at an eye-popping 1 vs. industry average of 3.40.
With memory prices so volatile, Micron's valuation has been driven into the ground due to fears over shrinking margin and declining YOY average sale prices for computers components in general. Warranted or otherwise, there's a great deal of fear currently baked into the equity price.
The company holds about $2.18B in cash and $1.74B in debt. It does not currently pay a dividend.
The stock has 88% institutional ownership, with 1.5% short ratio and float of 5.50%.
Source: Yahoo! Finance
Technicals: MU plummeted about 10% in the last 3 trading days (Wed/Thu/Fri) & is now trading below 50 SMA of $10.72 and just about at its 200-day SMA of $9.11.
On May 20th, an average-strength sell signal flashed via 20-day SMA dipping below 50-day SMA. The last 30 days have seen a steep drop, but shares have been under heavy accumulation from institutions, indicating strong bullish sentiment from "smart money" quarters.
MACD flashed a weak sell signal through an EMA cross on May 03, currently at -.34 with a divergence of -.6.
RSI and Williams %R confirm MU to be severely undersold.
General sentiment: While disagreeing on EPS estimates, analysts are almost uniformly bullish on the stock, with an average 12-mo price target around $14.50, implying close to 50% upside. S&P's Equity analysis gives the stock 4 out 5 stars, a buy.
Insider sentiment is neutral, with no large purchases or sales made recently.
Source: Fidelity Investments (login required)
Analysis: With markets experiencing significant jitters and broad rotation into defensive stocks, MU's recent pullback (over 16% down over the last month) represents a good opportunity to establish or broaden exposure to one of the most undervalued equities in the semiconductor space.
Although lagging technicals look very ugly, oversold indicators indicate there's little downside left. I believe MU has strong support around the $9 mark and is likely to experience rapid appreciation as soon as broad indexes stabilize. On an intermediate (6-9 months) timeline, the consensus target of $14.50 is fundamentally sound.
MU options carry a significant risk premium for staggering annualized returns. A couple of plays to consider:
A relatively conservative Oct 22nd $8 cash-covered put for a $.54 premium yields a YOY annualized return of about 18% (for comparative purposes only.) This implies a break-even price of $7.46, which would mean purchasing a top-tier semiconductor company with enormous downside protection at a forward P/E of less than 6.5.
A riskier approach involves purchasing Oct 22nd $10 calls for a $.78 premium. Assuming a conservative $12 price target (compared to analyst consensus of $14.50) this strategy yields $1.22 per contract, which amounts to a staggering 417% YOY return (for comparative purposes only.)
As always, hedged plays are advisable when deploying a large amount of capital.
Disclosure: Author is long MU via a mix of options and is likely to add to these positions within the next 48 hours.