Micron: Undervalued At $6

| About: Micron Technology (MU)

Micron Technology (MU) has had a few dismal quarters recently, but the culmination of recent developments have added tremendous potential for significant upside for its long-term projections. Below, I will show how Micron is still currently undervalued in the market, though its stock is already increasing, and could do so substantially throughout the remainder of the year. Recent acquisitions could position Micron as one of the foremost leaders in the worldwide DRAM market. Here are my findings.

A look at Micron's key indicators show a price to book ratio and price to sales ratio both around 0.71. Its price to cash flow ratio is around 2.52. Gross margin was around 11 percent, this was slight increase from Q2 2012. Operating margin decreased by around 850 basis points and return on equity decreased by fewer than 800 basis points from Q1 2012 through the end of Q3 2012. Net margin decreased from around 2.2 percent to a deficit of around 7.5 percent for the same time period. Micron's current ratio decreased from around 2.72 to around 2.59 from Q1 2012 through the end of Q3 2012. Micron's quick ratio increased from 1.68 to around 1.72 during the same time period. From Q1 2012 through the end of Q3 2012, Micron's debt to equity ratio increased by around 75 percent up 0.35. Micron's beta is currently around 1.29.

Micron's growth rate for this year is at a deficit and is more than eight times worse than the industry average. Its growth rate for the past five years has been around 25 percent greater than the industry average. Micron's projected growth rate for next year is around 70 percent higher than the industry average. Its projected growth rate for the next five years is around 90 percent the industry average. Micron's price to book ratio is more than half the industry average while its price to book ratio is less than half the industry average. Micron's net profit margin for the trailing 12 months was at a deficit of over 10 percent while its return on equity for the same time period was at a deficit of over nine percent.

During Q3 1012, ending on May 31st, Micron had a net loss of $320 million on net sales of 2.2 billion. It had a net loss of $282 million on net sales of $2 billion in Q2 2012 and a net income of $75 million on net sales of $2.1 billion in Q3 2011. Its sales growth has increased by around 1.54 percent from the previous year and by around 5.06 percent from the previous quarter. Revenue from DRAM products increased by 20 percent due to a 12 percent increase in sales volume and a seven percent increase in average selling price from Q2 2012. Sales revenue from NAND Flash products increased marginally from Q2 2012 as sales volume increased by 40 percent but average selling price decreased. In Q3 2012, NOR Flash products accounted for around 10 percent of the total net sales. Margins increased from sales in NOR Flash and DRAM products but were offset by decreased margins from sales of NAND Flash products.

On July 2nd, Micron ended the speculation and officially announced the pending acquisition of Elpida (OTC:ELPDF) for $2.5 billion. Micron also announced the acquisition of Powerchip for over $330 million as well. Together, these acquisitions will give Micron an 89 percent stake in Rexchip Electronics. It will also double Micron's market share in DRAM to 24.8 percent, making it the second most behind Samsung's (F)">SSNLF.PK) 40.8 percent and ahead of Hynix's share of 24.2 percent. These top three manufacturers now share 77 percent of total DRAM market share and 90 percent of the world's total chip industry. Micron only has to pay $750 million for Elpida initially; the remaining $1.75 billion will be paid through Elpida operating as Micron's subsidiary in installments by 2019 to its debtors.

These acquisitions create a 50 percent increase in Micron's total manufacturing capacity while utilizing Elpida's manufacturing capacity for less than 33 percent the cost of investing in manufacturing facilities. This also increases Micron's mobile DRAM market share significantly to 19.7, percent surpassing SK Hynix's 18.9 percent. It's now only trailing Samsung's 59.6 percent mobile DRAM market share. This is the ideal situation for Micron as Elpida is Apple's (AAPL) main supplier while Microsoft (MSFT) and Google (GOOG) are making significant investments in the smartphone and tablet markets as well. The DRAM industry contracted by around 25 percent last year while its revenues are expected to increase to $30 billion for the next few years and $39 billion by 2016.

Demand in this market is growing rapidly and Micron expects these acquisitions to contribute to cash flow and earnings throughout 2013. The DRAM market is growing so rapidly that Micron, Samsung and now many others including Microsoft, IBM (IBM) and HP (HPQ) are working together to create technology solutions to keep pace with the industry demands. Micron and Samsung created the Hybrid Memory Cube Consortium as a collaboration that welcomes all OEM's in to cooperate and build innovative memory technologies that can support large-scale networking and high performance computing. The OEM's are currently facing a "memory wall"; they need to improve the current technological architectures in order to provide increased density and bandwidth in conjunction with more efficient low power consumption systems.

With these two acquisitions, Micron has significantly improved its manufacturing capabilities along with its R&D capabilities and DRAM market share. With growing mobile PC, tablet and smartphones demands, these developments can substantially increase Micron's value in the market. Furthermore, Micron has effectively managed the negotiations in order to mitigate the impact on its cash flows through this transition period. The acquisition of Elpida has been long awaited and through savvy maneuvers, Micron ultimately brought Elpida in for a substantial discount. I believe Micron stock has the potential to double or triple between 2013 and 2015. I strongly urge investors to consider this stock now as its price may gain significant momentum in the market throughout the remainder of 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , , , Semiconductor - Memory Chips
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