I wanted to provide an update to one of the companies that I mentioned in my " weekly update" back in mid January - Micron (MU)
Comments I made back then :
" select fundamentally sound companies that will be tossed aside with the same gusto as the overvalued high flyers. As an example,the fundamentals of a name like (MU) haven't changed since their last earnings report that was fantastic. I added this name last week, it has the potential to earn $3-$3.50 this year and is selling @ 22-23. The stock barely budged during the S & P's 2.6% loss this week.. A sign of strength... First target 30..."
On April 3rd Micron posted its earnings for the second fiscal quarter in which the company beat analysts' expectations. Micron doubled its revenues year-over-year to $4.1B which translated to a non-GAAP EPS of 85 cents. Analysts were expecting $4.02 billion in revenues and an EPS of 76 cents.
This quarter also includes results from Elpida Memory Inc. that Micron purchased in 2013. Elpida was a Japanese semiconductor maker and was acquired while it was on the verge of bankruptcy. This acquisition has proved a huge positive for Micron since its sales have doubled in a period of 18 months. In my view it was and will continue to be a "Game Changer". Perhaps more synergies are yet to come from this acquisition as Elpida is the primary chip supplier to Apple Inc.
On the margin front Micron's gross profit margin slightly increased from 32% in the first fiscal quarter to 34% in the second fiscal quarter. However, the operating margin and net margins have improved impressively by 7% and 9%, respectively.
The company has forecasted capital expenditures for the fiscal year will fall in the range of $2.6 - $3.2 billion. Micron had cash and marketable investments of $5.06 billion at the end of the second fiscal quarter while during the quarter it generated cash flow from its operations of $1.39 billion. This leads me to believe that the company is able to generate enough cash flows to support its capital expenditures and R & D activities.
As reported on the recent earnings call (MU) anticipates the memory chip industry to remain favorable and therefore it aims to switch its production lines to make NAND chips from DRAM chips. NAND chips are used in smartphones and tablets while DRAM chips are used for personal computers. The strategy makes sense as the "world" has moved toward mobile technology for on-the-go usage. The outlook for the memory industry seems positive. The strong expansion of DRAM and NAND flash memory markets in 2013 which rose 35% and 28% respectively, is expected to occur in 2014 as well. Given these facts Micron's growth should continue well into 2015.
So with all of that good news the stock sold off 9% and is now off 14% from its February high.
A slew of negative reports from analysts followed the report, questioning the forward guidance to talk of slowing demand for NAND chips going forward. Combine that with a technology sell off and the "perfect storm " hit the shares.
Critics have stated that the company has a history of turbulent earnings and that is certainly true. Many also note that the stock has advanced some 400% from its low.. That is also true, but the earnings have been commensurate with that move,, should the shares be selling for $5-10, with earnings per share of $3-$4. ?
That logic is convoluted --- where a stock has come from has no bearing on where it may go, especially when the fundamentals are there to support that increase.. This isn't a biotech that has moved 400% and has no earnings !!
So one combines that "mindset" with a tech sell off, and in my view an opportunity has been laid at the doorstep. It's now time to see if Micron will indeed be a different company given the "game changing " synergies of their acquisition.
At this point in time I don't believe (MU) is a "core" holding by any means, its an intermediate holding (6 months - 1 yr), and as i would name it -- "special situation"
I'm fully aware of the "history" and cyclical nature of (MU), but my view on the stock does go back to the fall of '13, when I came upon the fact that (MU) purchased Elpida.
I wrote back then, "As Micron fully integrates Elpida over the next few quarters, I expected margins, estimates, and the multiple to expand as investors fully digest Micron's new earnings profile."
So far, at least from the earnings and margin standpoint that has worked out .
I wasn't disappointed with the last quarter at all, and in fact in the recent report, what's interesting is that despite Hynix' Wuxi fab coming online and a seasonally slow demand environment, Micron was able to meet its expectations for ASPs (average selling price) in both DRAM and NAND.
Therefore, I am not deterred by anything that I have seen or heard from detractors. In my view the reason I bought the shares initially is still in tact.
There are many times when the market will go against a position as sentiment towards a particular stock or a sector changes in the short term.. The technicals shape up as follows in the daily chart below :
Might there be more downside to the 200 day MA is anyone's guess. With the present price under $22, I believe it is a good time to step in and start a position. With the thought of adding to that position if any "market" weakness in technology shares take the stock down to the $19-20 level.
Given the quarterly EPS of 85 cents the annual EPS for fiscal year 2014, estimates call for $3.25. The estimate of $3.50 that I am most comfortable using for 2015 is on the low end of the spectrum.
The high for 2015 comes in at a whopping $5.27. While that would be great news, I'm not in that camp at the moment.
At the end of the day, Micron shares are inexpensive trading at only 7 times earnings. When i find a company that is selling at less than the "market" average with decent growth perspective, I take a look especially when all around me are clamoring that the "market" is overvalued. Here is one that certainly isn't.
If the thesis that I believe doesn't transpire, I'll have to re-evaluate. So far that isn't the case. and if it does continue I believe one has to give it the time it deserves to work thru the negative "mindset" to eventually play out in a higher share price ..
My initial target remains @ $30
Best of luck to all
Disclosure: I am long MU.
Additional disclosure: I am long numerous equity positions -- all can be seen here in my blog