Micron Technology: Value and Growth?

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

Micron Technology Inc. (NASDAQ: MU) holds a considerable portion of cash, nearly 40% of the current share price.  Current assets are over twice the value of current liabilities.  Subtracting current liabilities from current assets leaves Micron with a value of 60% of its current share price in fairly liquid assets.

So why the discount?  In short, investors are concerned about the quality of Micron’s earnings going forward.  The trailing P/E has ballooned to the 30’s, which is considerable given that over the past 2 years the P/E has spent the majority of the time below 15.

The driving force behind the shrinking earnings have been the collapsing demand for the company’s primary product, Dynamic Random Access Memory (DRAM).  DRAM is used widely in computers as a cheaper substitute to Static Random Access Memory (SRAM).

But let’s ignore the concern over earnings for a moment to talk about an important development.  Management is finishing up the toolings at their acquisition, IM Flash Singapore.  They anticipate this will decrease capital expenditures by approximately $9 billion next year, which translates to an extra $2.27 per share for the year.  If you add this number to the previously discussed amount of current assets per share, you reach the value of the current stock price. 

Now, no investment is at a safe valuation if earnings are going to be weak or negative; there are a number of factors to consider going forward: 
                1. Market demand: Micron is one of the top five memory suppliers in the world by 2010 revenues.  They will be huge beneficiaries if demand in the memory markets improves.  DRAM prices have historically been very volatile, able to increase triple digit percentages over the span of a few months.

                2.  Diversity: Micron has branched out to NAND memory, which is used in a variety of handheld electronic devices such as smart phones and tablets.  This market has grown substantially over the past few years.  Last quarter marks the first time NAND revenues were greater than DRAM revenues for Micron showing that they are increasing their position in this market.

                3. Legal clouds: Micron recently received a favorable ruling in a long running court case with Rambus Inc.(NASDAQ: RMBS).  Rambus was seeking $12 billion in damages from Micron for antitrust damages.  Rambus received nothing in the verdict, except a 60% drop in its share price.   They will appeal the decision and continue to pursue their case.

Micron has a number of things that can go right for it in the future and lead to earnings growth.  Their balance sheet and cost reduction plans going forward make their share price look considerably cheap at its current level.  There are few times you can get both value and growth, Micron may be one of the best compromises out there.


Fool blogger Eric Lumsden doesn't own shares of any company mentioned in this post.

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