We recommend selling Micron (MU) ahead of its 3Q'12 earnings release on September 27 for a short-term speculative trade. Our bearish call is based on a combined assessment of what we believe to be useful predictive factors for earnings surprises and post-earnings stock price movements. These factors span key variables across valuation, analyst estimate trends and technical strength.
Valuation (slightly overvalued)
We believe Micron to be slightly overvalued both on an absolute and relative basis. On an absolute basis, Micron's 2013 P/E based on consensus analyst estimates currently stands at 39.6x, which we believe to be above fair value, given its projected 2013 revenue growth of only 13%, and declining gross and EBIT margins over the past 2 years. On a relative basis when compared to its publicly traded comparables, Micron is valued at a significant premium to Intel (INTC) and Spansion (CODE) on a 2013 P/E basis, partially as a result of its higher expected EPS growth in 2013. However, it's valued at a discount to Intel and Rambus (RMBS) on a 2013 EV/Revenue basis.
A summary comparables analysis is presented below to highlight key valuation multiples, growth, and profitability metrics between Micron and its comparables:
Valuation Multiples
Market | Enterprise | P/2013 | P/2012 | EV/2013 | EV/2012 | |||
MU | 6,059 | 6,939 | 39.6x | N.M. | 0.7x | 0.8x | ||
INTC | 113,250 | 106,760 | 10.2x | 10.6x | 1.9x | 2.0x | ||
CODE | 695 | 836 | 7.2x | 11.8x | 0.8x | 0.9x | ||
RMBS | 586 | 523 | N.M. | N.M. | 2.0x | 2.2x |
Growth
Revenue | EPS | ||||||
FY13 | FY12 | FY11 | FY10 | FY13 | FY12 | ||
MU | 13% | -4% | 4% | 77% | 115% | -694% | |
INTC | 4% | -1% | 24% | 24% | 3% | -10% | |
CODE | 11% | -11% | -8% | -17% | 64% | -14% | |
RMBS | 6% | -22% | -3% | 186% | 68% | -138% | |
Profitability
Gross | EBIT | ||||||
FY11 | FY10 | FY09 | FY11 | FY10 | FY09 | ||
MU | 20.0% | 32.0% | -9.2% | 8.6% | 18.7% | -30.0% | |
INTC | 62.5% | 65.3% | 55.7% | 32.4% | 35.7% | 16.9% | |
CODE | 20.8% | 21.1% | 21.8% | 0.7% | -3.8% | -3.3% | |
RMBS | 92.3% | 97.9% | 93.9% | -0.5% | 70.2% | -67.1% | |
Source: Company filings, Yahoo Finance
Analyst Estimate Trends (bearish)
Current Analyst Estimates
Revenue estimates for Micron's current quarter range from $1.9bn to $2.4bn, with an average estimate of $2.12bn (-1.1% from $2.14bn in 3Q'11), while EPS estimates range from $-0.35 to $0.00, with an average estimate of $-0.22 in EPS (-57% vs. $-0.14 in 3Q'11).
Micron has missed EPS estimates for the past 4 consecutive quarters. Recent analyst EPS estimate revisions are bearish, with 3Q'12 EPS being revised down from $-0.21 (90 days ago) to $-0.22 (current), and FY13 EPS being revised down from $0.23 (90 days ago) to $0.15 (current).
EPS Surprise History (neutral)
2Q'12 | 1Q'12 | 4Q'11 | 3Q'11 | |
EPS Estimate | (0.20) | (0.19) | (0.08) | 0.01 |
EPS Actual | (0.32) | (0.29) | (0.19) | (0.14) |
% Surprise | -60% | -53% | -138% | -1500% |
EPS Estimate Revisions (neutral)
FY13 | FY12 | 4Q'12 | 3Q'12 | |
Current | 0.15 | (1.01) | (0.06) | (0.22) |
7 Days Ago | 0.18 | (1.01) | (0.05) | (0.22) |
30 Days Ago | 0.18 | (1.01) | (0.05) | (0.22) |
60 Days Ago | 0.18 | (1.01) | (0.04) | (0.21) |
90 Days Ago | 0.23 | (1.01) | (0.04) | (0.21) |
Source: Yahoo Finance
Technical Strength (neutral)
We believe Micron's underlying technical strength, as measured by its historical share price performance, to be neutral, with its Moving Averages under bearish signals and MACD oscillator under bullish signals.
Moving Averages
- 20-Day Moving Average: Bearish
- 50-Day Moving Average: Bearish
- 100-Day Moving Average: Bearish
MACD
- 20-50 Day MACD Oscillator: Bullish
- 20-100 Day MACD Oscillator: Bullish
- 50-100 Day MACD Oscillator: Bullish
Earnings Speculator is a trading advisory service designed to capture alpha by predicting post-earnings moves of stocks through a detailed analysis of key predictive factors. While our goal is to generate consistent alpha over time through employing a long-term positive probability edge in our predictions, the ultimate performance of any one of our individual stock recommendations is highly uncertain. We strongly recommend allocating no more than 2% of your trading portfolio to each of our recommendations in order to sufficiently diversify your risk and to be well positioned for long-term alpha generation through focusing on the prediction of post-earnings share price movements.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
