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Micron Technology Continues To Offer Growth And Value

|About: Micron Technology Inc. (MU)

Summary

Even though Micron has had an incredible run over the last year, it is still a bargain.

Investors should not let recent headwinds deter their confidence in the company.

The stock has 40-50% upside and could hit $50 a share by year-end 2015.

Despite Micron Technology's (NASDAQ:MU) share price meteoric rise over the last year, the shares of the Boise, Idaho manufacturer of DRAM semiconductor chips is significantly undervalued. Micron's stock has increased an astonishing 89% over the last year and 55% so far in 2014. Shares have substantially outpaced the S&P's 14.5% annual return and 9.2% year-to-date return. In addition, the stock has beaten the PHLX Semiconductor Index (^SOX), which has an annual return of 28% and a year-to-date return of 21%. The company's share price has faced multiple headwinds over the last month, which has resulted in increased volatility. The market has been somewhat skittish due to worries over insider selling, the proposed Samsung plant and chip supply. The market is currently discounting Micron's share price, but I believe it is only a matter of time before the market rewards the company a multiple that is at least in line with the S&P 500, which would equate to a price north of $50 a share.

Chart courtesy of CNBC.COM

The stock has been stuck in a trading range of roughly $27-$34 a share since June. There have been several days recently where the overall market has tanked, bringing Micron down with it. In addition there have been some concerns over insider selling. For example, the stock hit an intraday low of 29.73 on September 16th after it was revealed in an SEC filing that Ronald C. Foster, the company's CFO, had sold 20,000 shares. Micron also participated in the general market sell-off in mid-October, dropping to as low as $27.03. Additionally, concerns of oversupply in the DRAM market have also driven the share prices down. I think dips like these offer great entry points or a chance to add to a current position.

Latest Quarter Performance

Micron derives over two-thirds of its revenues and earnings from DRAM sales. The company reported a fiscal fourth-quarter profit of $1.15 billion, or 82 cents a share, on revenue of $4.23 billion. This is compared to the year-ago period, when the memory chipmaker earned $806 million, or 68 cents a share, on $2.84 billion in sales. Analysts surveyed by FactSet had forecast Micron to earn 81 cents a share on $4.16 billion in revenue. These numbers equate to a 42% year over year increase in earnings and a 48% increase in year ago revenues. In addition, the company raised guidance for both EPS and revenues.

The company is scheduled to report fiscal first-quarter results ending November30th in early January.

Earnings Est

Current Qtr.
Nov 14

Next Qtr.
Feb 15

Current Year
Aug 15

Next Year
Aug 16

Avg. Estimate

0.92

0.89

3.68

4.11

No. of Analysts

27.00

27.00

30.00

23.00

Low Estimate

0.72

0.73

3.10

2.30

High Estimate

1.05

1.02

4.26

5.25

Year Ago EPS

0.77

0.85

3.23

3.68

Chart courtesy of Yahoo Finance

Of the 27 analyst polled, the consensus EPS estimate for the current quarter is $.92, with 30 analyst expecting full-year earnings for 2015 to be $3.68 and 2016 earnings to come in at $4.11. Revenues are predicted to grow 14% from the second quarter to just over $4.6 billion, and full-year 2015 revenues are expected to be $18.4 billion, representing a 13% increase from year-ago sales.

The company has delivered an earnings surprise each of the last four quarters. Over the last 90 days, the company's earnings estimates have been revised upward. The current quarter estimates are now $.92 compared to $.84 three months ago. The year-end numbers have also been revised upward from $3.45 ninety days ago to the current estimate of $3.68. This is an important point because stocks that have recently had their estimates revised upward by analysts tend to the market outperform over the near term. Given its history of earnings surprises and analysts' upward revisions, I would not be surprised if Micron delivers yet another beat when they announce earnings in January.

Samsung and Insider Selling

In early October Samsung (OTC:SSNLF) announced a $15 billion investment in a chip factory, which has raised concerns of rising DRAM supply. Construction of the new plant is scheduled to be completed by the second half of 2017. This dampened sentiment in this space and contributed to Micron's shares subsequent drop. Analysts from both Drexel and Needham reiterated their positive ratings on the stock and suggested that glut concerns over the Samsung development were overblown. According to Rajvindra Gill of Needham & Co "…DRAM is a sizable profit center for the firm [Samsung] accounting for nearly 50% of its operating profits and therefore, Samsung has no incentive to lower prices and destroy its primary profit pool." Gill rates Micron a strong buy with a $60 price target. Drexel Hamilton's Rick Whittington reiterated a Buy rating and a $50 price target, and explained that the new factory was a reflection of Samsung's desire to keep up with chip demand and be well-prepared for orders from Apple (NASDAQ:AAPL).

Shortly after the Samsung announcement, Microchip Technology led semiconductor stocks down as its CEO warned investors of an inventory correction. However, Micron's main business is the DRAM space, and if anything there's a supply shortage of these chips. Mark Newman of Bernstein Research explained that DRAM is actually in a supply constraint:

"The memory cycle has been more supply driven rather than demand driven and thus mostly independent of the non-memory semis cycle. Memory supply is fundamentally constrained due to shrink slow-down, increased technological complexity and rational behavior following consolidation. This long term supply constraint1is not at all impacted by what Microchip said."

This does not sound like there will be a glut of DRAM chips anytime soon, but the market has memories of inventory issues that the space experienced in 2012 so it may take a bit of time for investors to believe that "it's different this time." This is consistent with what Micron CEO expressed during the fourth quarter conference call said he expects the DRAM industry supply-demand balance to continue to be favorable "for the foreseeable future."

Some investors also have been getting nervous over increased selling by company insiders. Again in early October, Barrons reported that four insiders recently sold a total of 167,000 shares of Micron according to SEC regulatory filings. However, the article also quoted "There's no logical reason to assume these continued sales are suddenly foreshadowing an imminent decline in stock..This is normal, unremarkable and generally not significant selling." Often stock sales of insiders are tied to compensation, and also, when compared to total holdings, these transactions are insignificant.

Valuation

The stock has recovered nicely from its mid-October swoon. The company's shares participated in the snap-back rally that chipmakers and the broader market experienced in the latter part of October. In addition, last week when company announced a $1 billion stock buyback, shares jumped 4%. Micron currently trades at 13 times earnings which is in line with the industry average. The stock offers compelling valuation based on near-term revenue and earnings growth estimates and sports a very attractive PEG of .87. The stock trades at just 8 times 2016 estimates. If the company maintains its current price/earnings multiple and hits its 2016 fiscal year estimates of $4.11, then a $50-$53 price target seems quite reasonable.

Summary

Micron, one of the three main players remaining in the DRAM space, is still undervalued. Selling at only roughly 13 times earnings, a PEG of only .87 and robust estimated earnings growth, Micron's shares are just too cheap to ignore. Concerns of a DRAM market glut are overblown, and it is very likely that the company's shares will be trading north of $50 within a year.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.