Micron Earnings Preview: Estimate Revision Trends Still Negative, But Stock Remains Cheap

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About: Micron Technology, Inc. (MU)
by: Brian Gilmartin, CFA
Summary

EPS estimates for fiscal '19 and '20 have been reduced 25% the last 6 months.

The question remains: What is Micron's "normalized" EPS over a full cycle?

On any valuation measure, the stock is cheap, but can MU remain free cash flow positive near the cycle bottom? That will be the real improvement.

With Micron (MU) trading just under $30 when the company last reported fiscal Q1 '19 EPS last (late) December '18, revenue and EPS estimates have been reduced sharply since then, but the stock has rallied from the low to high $30s with the general equity market in calendar 2019.

Micron reports its fiscal Q2 '19 earnings on March 20th, 2019, following the closing bell, with consensus Street expectations expecting $1.70 in earnings per share on $5.89 billion in revenue for expected year-over-year declines of 40% and 20%, respectively.

Micron's stock peaked just over $60 in March and June of 2018, and since then, the stock has corrected 40-50% as EPS and revenue estimates have also fallen sharply.

Micron EPS estimate trends

MU's EPS estimate as of month end for the last 13 months

Source: IBES by Refinitiv

MU's revenue estimate trend as of month end for the last 13 months

Source: IBES by Refinitiv

As readers can quickly see, while the stock peaked in the first or 2nd quarter of 2018, the revenue and EPS estimates peaked in June, July of 2018, and then started to see sharp downward revisions following the September and December '18 earnings reports.

Has Micron's Business Model Fundamentally Changed?

Looking at "peak margins" for the cycle that ended in late 2014 and then again the peak for this cycle, a good case can be made it has, and that is supported by free cash flow (FCF), if in fact FCF can remain positive during the downturn.

Here are "peak" margins for the last two Micron cycles:

Aug '18 Q4 peak Nov '14 Q1 peak
Gross mgn 61.4% 35.8%
peak cycle chg 25.6%
Op margin 52.6% 23.7%
peak cycle chg 28.9%
Profit mgn 51% 24.9%
peak cycle chg 26.1%

Source: Micron internal financial and valuation model

Expected forward growth rates for MU:

Fwd expected EPS growth Fwd exp rev growth
Fiscal '19 -38% -18%
Fiscal '20 -16% -1%
Fiscal '21 -13%% +1%

Source: IBES by Refinitiv

Summary/Conclusion:

Micron is currently in the midst of its first down cycle since early 2015 and 2016.

There are two metrics that correlated closely with the 2016 bottom in MU near $10 per share that caught my attention: 1.) Price-to-sales was under 1x, and price to book was also under 1x when MU's stock bottomed in the first quarter of 2016.

As of the November '18 fiscal Q1 release in late December '18, MU in the lower $30s was trading at just over 1x book and 1.15x price-to-sales.

Readers can see with the expected forward growth rates that, for a relatively small change in revenue, MU can see a substantial change or delta in EPS, and that is what has weighed on the stock currently.

Personally, I do think the MU cycle is probably closer to the end than the beginning, since the peak-to-trough cycle in late 2014 lasted 6 quarters, although pressure remains on DRAM pricing per the sell-side as numbers are still being taken lower heading into next week's earnings report.

We sold the stock near $28 missing a doubling of MU in the subsequent 12 months, but the stock has retraced the gain, and the aim today is to give it one more quarter and see what free cash flow and how guidance looks with the February '19 earnings release on March 20th.

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.