The Market Does Not Care About Micron Technology, Shareholders Act Now

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About: Micron Technology Inc. (MU)
by: Michael Wiggins De Oliveira
Summary

Micron is too cheap to be ignored for long.

The company's strong free cash flow generation is not being fully appreciated.

Shareholder dilutions could be a concern.

Investment Thesis

The past several weeks has seen Micron Technology (NASDAQ:MU) sell off. The share price is now around 15% cheaper than its peak - for no significant reason at all. To be a successful value investor, one needs to disregard quarterly results and think longer term. Also, importantly, investors need to fully disregard investment bankers, who issue either positive or negative reports for short-term gains. I recommend that investors objectively consider Micron's free cash flow capabilities and the price at which the stock trades at relative to what it could trade for 2-3 years down the road.

Price Movements

Back on January, 31, 2018, when Micron stock traded for roughly $43.70, I initiated following the stock. And in that article, I wrote:

Many investors, particularly hard-core value investors would consider an investment in Micron Technology (MU) as overvalued and having missed the opportunity. I strongly disagree this to be the case. Micro is a rare investment where, in spite of it trading at all-time highs, I still believe it to have a large margin of safety.

So, here is the irony. In a few short months, the stock would sell off quite dramatically and come down more than 15%. However, the share price is up 15% from when the article was first published (including the sell-off from its recent quarterly results). My point being, to use this sell-off; not to panic about a change of your thesis, but to use it to your - the investor's - advantage, by either purchasing more shares or simply doing nothing. Every time a share price moves significantly in one direction or another does not automatically demand that investors sell. In fact, as Mohnish Pabrai says:

All portfolio managers' miseries derive from not being able to sit quietly in a room alone.

In summary, share price volatility is not a call to sell. Constant investor action makes brokers wealthy, not shareholders.

Recent Developments

Micron's Q2 2018 was solid, with revenue up 58% to $7.35 billion, and with remarkable non-GAAP operating income margin at 49.4%. Importantly, free cash flow was also strong at $2.2 billion in the quarter, in spite of capex hitting $2.1 billion (net of amounts funded by partners).

Which brings me to one potential concern amongst the investment community - that Micron's elevated capex, guided for, net of partner contributions, to be in the around of $7.5 billion is just too high.

Valuation

The company's undervaluation is made evident in the above table. Compared with its peers, its cash flows are valued the cheapest. Furthermore, I suspect that investors are paying a little too close attention to how Western Digital (NYSE:WDC) is being priced and extrapolating that opportunity and valuing Micron similarly. Although the two companies have significant overlaps, their free cash flow generating capabilities are very different, with this author much preferring Micron's long-term opportunities over Western Digital's.

The number of shares being sold short has come down by 5% in the last couple of weeks, and presently stands at 5.7%. Previously, in the middle of April, Micron shares had hit an all-time high, which makes little sense when a stock already trades at such compressed multiples.

Material Concern

Overall, I'm highly bullish Micron. I like a strong cash-generating company, and not having to pay much for its shares. However, I'm surprised to see management needing to dilute shareholders by a further 34 million shares (and bringing in $1.36 billion). For Q3 2018, management guides that the total number of diluted shares would be roughly 1.25 billion, which is yet another leap in the share count and leaves a bitter after taste. There is, in my mind, little need for management to bring up the total number of outstanding shares by 20% since YE 2016.

Furthermore, given that Micron ended Q2 2018 with a small net debt position of less $1 billion, there is little need for management to raise cash by diluting shares.

However, the one thing that allays my concern comes from the fact that Micron's management compensation is 50% tied to the company's profitability, and management is doing a phenomenal job here and delivering strong results.

Takeaway

The market remains too impatient for "quick bucks". With so much data available, investors are clearly confusing surplus of data with quality information. I advocate that investors simply weigh up Micron's free cash flow capabilities and assess what its realistic valuation could trade for and compare it with the bargain its shares are currently priced at. Of course, its shares will remain volatile in the period between now and full appreciation. But volatility is part of the game. Our gains come from high-conviction buying, and then patiently waiting a few years for the share price to correct.

Disclaimer: Please do your own due diligence to reach your own conclusions.

Note: The only favor I ask is that you click the "Follow" button so I can grow my Seeking Alpha friendships and our Deep Value network. Please excuse any grammatical errors.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.