Should We Follow Robert Karr Into This Stock?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Robert Karr, one of the Tiger Cubs, who learned investing knowledge from famous investor Julian Robertson, managed to deliver sweet annualized returns of more than 22% during the period of 1999-2010. With more than $900 million in total assets under management, he holds a concentrated portfolio with only 14 stocks.

In the first quarter of 2013, he accumulated shares of Micron Technology (NASDAQ: MU), a global semiconductor company. As of March 2013, he owned more than 8.5 million shares in the company, representing about 9.4% of his total portfolio. Should we follow him into Micron Technology at its current trading price? Let’s find out.

Business snapshot

Micron Technology is a global manufacturer of semiconductors including NAND Flash, DRAM, and NOR Flash memory, operating in four business segments: NAND Solutions Group (NSG), DRAM Solutions Group (DSG), Wireless Solutions Group (WSG), and Embedded Solutions Group (ESG).

The majority of its sales, $2.85 billion, or 34.6% of total 2012 revenue, was generated from the NSG segment. The DSG segment ranked second with $2.69 billion in revenue. The ESG segment contributed the lowest revenue of only $1 billion in 2012. However, there were only two profitable segments in 2012. They were the NSG and the ESG segments, with $198 million and $156 million in operating profit, respectively, while the DSG and WSG segments produced losses of $500 million and $370 million, respectively.

Negative net income but good cash flow

In terms of customers, 25% of its total revenue was derived from sales to computing (including desktop PCs, notebooks, servers), while consumer electronics ranked second, accounting for 20% of the total revenue. The mobile division represented around 15% of the total sales in 2012.

In 2012, Micron generated around $8.23 billion in revenue but a net loss of more than $1 billion. The net loss was due to a 45% drop in gross profit and a 16% increase in R&D expense. However, its operating cash flow stayed strong at more than $2.1 billion while free cash flow reached $415 million in 2012.

Micron becomes the third largest NAND flash memory maker

According to DRAMeXchange, in 2012, Samsung (NASDAQOTH: SSNLF) was still the global leading player in NAND flash memory with nearly $7.3 billion in revenue, accounting for 38.2% of the total market. Toshiba ranked second with a 27.9% market share. Micron has surpassed SK Hynix to stand in the third place with a 13.9% NAND memory market share. Intel (NASDAQ: INTC) stood at the fifth place as it generated only $1.54 billion in revenue from NAND flash memory, accounting for 8.1% of the total market.

At around $9 per share, Micron is worth around $9.6 billion on the market. The market values Micron at 7.7 times EV/EBITDA and 1.4 times its book value. Compared to its much bigger peers, including Samsung and Intel, Micron is the most expensively valued company.

Samsung is the biggest company, with around $180 billion in total market cap. At $1,380 per share, Samsung is valued at only 4 times EV/EBITDA and 1.72 times its book value. Recently, Samsung announced that it began to mass-produce a 128 Gb, 3bit multi-level-cell NAND memory chip, strengthening the capacities of future high-density memory solutions.

Intel is trading at nearly $22 per share, with a total market cap of around $108.5 billion. The market values Intel at only 4.65 times EV/EBITDA and 2.12 times its book value. Interestingly, Intel and Micron have extended the joint development program between themselves and expanded it to include emerging memory technologies. Both companies have already had several agreements with each other in terms of NAND flash memory products supply, Intellectual Property, and R&D funding related to non-volatile memory manufacturing.

Among the three, income investors might choose Intel, as it is the only company that pays dividends. At its current price, Intel’s dividend yield is quite juicy at 4.2%.

My Foolish take

Among the three, I prefer the big players such as Samsung and Intel, as they have a lot of resources to fund R&D for new technologies. Both Samsung and Intel look pretty cheap with their low valuation. Income investors could get a sweet dividend yield of 4.2% when investing in Intel at its current price.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus