Micron: Bad Juju or Good Momo

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

There are some stocks where you look at their charts and you just wonder why would anyone buy it? You look at negative earnings per share, no yield, and a very troubled history. Just how is this zombie still walking?

I look at Micron Technology (NASDAQ: MU) with a sense of wonder, wondering how they are managing to stay upright. A year ago it was hit with the tragic death of their CEO in a small plane crash, sad, but the stock was already cut off at the knees by low prices for its DRAM (dynamic random access memory) chips.

Once upon a time Micron was an $80 stock. It dipped below $2.00 in late 2008. This is almost in line with the decline in chip prices from $8 to under a dollar. If you bought at that bottom you would have had more than a quadruple but is it going anywhere from here?

Micron currently has -$1.12 EPS but a 14.92 forward P/E. The latest loss for Q1 2013 of $275 million reported on December 20 makes for a string of six consecutive quarterly losses. It also marked a worse than expected loss of -$0.27 per share. The company reports again on March 18.

Strengths

  • Despite the sudden death of CEO Steve Appleton, current CEO Mark Durcan stayed on for a seamless transition although he had already announced plans to retire.
  • The company was able to acquire Japanese DRAM maker Elpida Memory and the Elpida gross margins had risen 26% by Q4 causing Jefferies to reiterate Micron a Buy on February 8. Elpida doubles Micron's share of the memory market when the deal finally closes the first half of this year.
  • The company just priced a $270 million convertible senior note offering coming due in 2033 and with corporate debt so cheap, this can be seen as a positive for the company.
  • Prices for DRAM have increased significantly since last fall and as the 2nd largest DRAM manufacturer in the world after Samsung, Micron is poised to profit at the same time as the cost of manufacturing is going down.
  • The successful resolution of the Rambus lawsuit in Micron's favor ends multiyear legal wrangling over DDR memory chip royalties which Micron does not have to pay to Rambus.
  • Corporate governance risks are low for all metrics: Board, Audit, Compensation, and Shareholders' Rights.
  • Analysts expect a 198.10% EPS growth rate over the coming year to average out to a 14.04% growth rate over the next five years.

Weaknesses

  • The DRAM and NAND markets are volatile with wild swings on price and supply. Just like the dry bulk shipping index chip prices are updated daily on an exchange. 
  • The company's multi-year billion dollar losses and the purchase of Elpida for $2.2 billion have stretched the Boise based company thin. Hopefully, the senior note offering and delays in payment on the Elpida deal while the yen goes lower will help ease these stresses.
  • The demand for PCs gets weaker and weaker and Micron has already suffered due to this trend. Microsoft's Windows 8 and Surface hybrid should improve demand somewhat and should provide a small lift for Micron.
  • Return on equity (-12.51%) and net income have decreased over the last year and the company is underperforming its semiconductor peers and the S&P 500.

Opportunities

  • Elpida is now their ace in the hole with Apple switching to Elpida as its mobile DRAM supplier and this one deal alone should be immediately accretive with $470 million in possible profits. Similar deals with other smartphone makers should be pursued relentlessly.
  • Micron needs to continue growing NAND flash while gradually de-emphasizing DRAM for PCs. NAND flash is in most smartphone and tablets as a memory component. Mobile DRAM markets have been growing by double digits annually with  increasing need for DRAMs in ultrabooks, tablets, and smartphones. In particular, IHS iSuppli predicts DRAMs in tablets will have grown almost 100% from 2011 to 2016.
  • The company has a joint venture with Intel (NASDAQ: INTC) on a high bandwidth low power DRAM stacking solution for supercomputing called the Hybrid Memory Cube resulting in 90% less space usage and 70% less power needed while improving memory bandwidth 15 times. Supercomputing has commercial applications for many industries with the most understandable being the driver assistance features in new cars. More joint ventures in the future would bode well for Micron.

Threats

  • Competition from Samsung is expected to grow fiercer. Samsung and Micron are in a heated race on TLC NAND chips and that's just one chip. South Korean competitor Hynix just posted a profit and they are gaining on Micron as well.
  • So far, everything is looking good for the Elpida deal going through but a risk would be any last minute Hail Mary legal passes by US bondholders in Elpida. The Elpida deal needs final approval from Delaware Bankruptcy Court and creditors of Elpida's still have until the end of February to vote on the planned sale.
  • Any slowdown in tablets, smartphone, and ultrabook sales will impact Micron. As PC sales continue to decline revenues from the former need to offset DRAM losses from PCs.
  • Value investors prefer partner Intel's 9.89 P/E and 4.30% yield, one of the best deals in big tech. Intel's PEG is 1.01 so it's priced for perfection right now. The maker of digital technology platforms is expected to grow EPS by 12.33% annually over 5 years and has a mean price target of $23.00 for some 10% upside.

Things Have Got To Go Right

Several very important things have to go very right for Micron like the closing of the Elpida deal after which investors should be able to heave a long deserved sigh of relief. But then Elpida and Micron have to integrate seamlessly and keep major client Apple very happy. There are some signs that Micron's juju may have turned around and then it will definitely have some good momo. This stock could go a lot higher if Elpida turns out to be everything they hoped for and more. Micron could have a speculative spot in a portfolio but a big tech like Intel on any pullback is a better bet long term.


leglamp 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