Earnings Analysis: Micron Technology

| About: Micron Technology (MU)

Micron Technology (NASDAQ:MU) recently reported its preliminary financial results for the year ended Aug. 31, 2012. Based on these results, CapitalCube provides a unique peer-based analysis of the company below.

Micron Technology's analysis vs. its peers uses the following peer set: SanDisk (SNDK), STMicroelectronics (NYSE:STM), Spansion (CODE), Melexis (MELE), Rambus (NASDAQ:RMBS), and STEC (NASDAQ:STEC). The table below shows the preliminary results along with the recent trend for revenues, net income, and returns.

Annual (USD million) 2012-08-31 2011-08-31 2010-08-31 2009-08-31 2008-08-31
Revenues 8,234.0 8,788.0 8,482.0 4,803.0 5,841.0
Revenue Growth % (6.3) 3.6 76.6 (17.8) 2.7
Net Income (1,032.0) 167.0 1,850.0 (1,835.0) (1,619.0)
Net Income Growth % (718.0) (91.0) N/A N/A N/A
Net Margin % (12.5) 1.9 21.8 (38.2) (27.7)
ROE % (12.8) 2.0 29.2 (33.9) (23.2)
ROA % (7.1) 1.1 14.2 (14.7) (11.5)

Valuation Drivers

Micron Technology's current price/book of 0.7 is about median in its peer group. Its P/E multiple is negative now, so EBITDA ratios provide better peer comparisons. Micron's share price implies less than peer median growth (price-to-EBITDA multiple of 3.5 compared to the peer median of 7.9). The market seems to expect Micron's around median rates of return (EBITDA return on equity of 20.2% compared to the peer median of 19.5%) to decline.

The company's profit margins are below the peer median (currently -12.5% vs. the peer median of -5.5%), while its asset efficiency is about median (asset turns of 0.6 times compared to the peer median of 0.6 times). Micron's net margin continues to trend downward and is below (but within one standard deviation of) its five-year average net margin of -9.6%.

Economic Moat

Changes in the company's annual top line and earnings (-6.3% and -718.0%, respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to their peers.

Micron's return on assets is less than its peer median currently (-7.1% vs. the peer median of -4.4%). It has also had less-than-peer-median returns on assets over the past five years (-3.6% vs. the peer median of -1.2%). This performance suggests that the company has persistent operating challenges relative to its peers.

The company's gross margin of 38.7% is around its peer median, suggesting that Micron's operations do not benefit from any differentiating pricing advantage. In addition, Micron's pre-tax margin of -9.2% is around the peer median, suggesting no operating cost advantage relative to peers.

Growth and Investment Strategy

While Micron's revenue growth has been above the peer median (19.7% vs. 10.6%, respectively, for the past three years), the stock's price/EBITDA ratio of 3.5 is less than the peer median. (Note: We use price/EBITDA instead of P/E due to negative earnings.) This implies that the company's earnings are peaking and the market expects a decline in its growth expectations.

Micron's annualized rate of change in capital of 12.2% over the past three years is around its peer median of 12.2%. This median investment has likewise generated a peer median return on capital of 4.1% averaged over the same three years. This median return on investment implies that company is investing appropriately.

Earnings Quality

Micron reported relatively weak net income margins for the last 12 months (-12.5% vs. the peer median of -5.5%). This weak margin performance and relatively conservative accrual policy (38.2% vs. the peer median of 13.8%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

Micron's accruals over the last 12 months are positive, suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median, which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile

Micron Technology provides advanced semiconductor solutions. It manufactures and distributes advanced semiconductor solutions such as Dynamic Random Access Memory, NAND flash memory, CMOS image sensors, other semiconductor components, and memory modules. The company operates its business through four segments: DRAM Solutions Group, NAND Solutions Group, Wireless Solutions Group, and Embedded Solutions Group. Micron was founded in October 1978 and is headquartered in Boise, Idaho.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Semiconductor - Memory Chips, Earnings, SA Submit
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