3 Big Reasons to Buy Micron Before 2013

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

Micron Technology (NASDAQ: MU) is poised for growth during 2013, and now is the time to get on board. It has been trading just below $6 per share over the past month, down from a high of $9 earlier this year.

Once the purchase of Elpida Memory goes through, a triple whammy of synergies will occur. First, Micron will acquire Elpida's customer base, including Apple. Second, Micron will be able to streamline its manufacturing processes. And lastly, Micron will control a larger percentage of DRAM manufacturing, allowing the company to better control pricing in a highly competitive market.

Micron's primary product lines include DRAM and NAND, as well as flash memory sold to the mobile device market. Micron's manufacturing facilities are located all over the globe, including several in the US and many in Asia. Micron has entered into partnerships with several firms, including Intel (NASDAQ: INTC)Photronics, and Nanya to design, develop, and manufacture a portion of NAND, DRAM, and other products.

Valuation

Micron has about 1.02 billion shares outstanding, a market capitalization of about $5.8 billion, and an enterprise value of around $6.7 billion. All of the standard ratios show Micron in a weaker position than the Semiconductor Industry and the Technology sector as a whole:

  1. Price to free cash flow is only 14, compared to 149.0 for the industry and 28.72 for the sector.
  2. Current price to tangible book value is 0.79, compared to 1.89 and 4.41, for the industry and sector, respectively.
  3. Price to sales valuation is 0.71, compared to 1.50 for the industry, and 9.47 for the sector.
  4. Sales Growth rates for the most recent quarter were -8.3%, compared to 5.1% and 50.1% for the industry and sector, respectively.
  5. Sales Growth rates for the trailing 12 months were -6.3%, compared to -2.2% and 18.9%, for the industry and sector, respectively.

I believe that much of this weakness is due to a general slow down in demand for PC's and an uncertainty about the Elpida acquisition. However, I am impressed by a strong increase in R&D spending. This shows that Micron is looking towards the future by improving its products and brand. Year end 2012 results show that Micron increased R&D spending by 14%, to 11% of net sales from 9% of net sales in fiscal year 2011. On Nov. 3, Micron was awarded several new patents by the U.S. Patent Office.

I'm also impressed by Micron's strong balance sheet. Although the DRAM market has been sluggish (down 9% in the latest quarter), Micron clearly has the (current) assets available to weather this storm.

Micron is not alone in suffering a downturn in DRAM sales. Many of the companies in the Technology sector have taken a hit due to a slowdown in the PC market. Analysts watching Intel, for example, expect an 8% drop in earnings when the company reports results next quarter. Swiss firm Logitech, as reported here, is also expecting earnings in the second half of this fiscal year to be lower than 2012 results.

In addition to the general softening of the PC market, the arrival of Windows 8 from Microsoft (NASDAQ: MSFT) late in October is not generating an increase in DRAM production, as earlier Operating System releases have. Analyst Clifford Leimbach from market research firm IHS states:

"Debuts of new PC operating systems from Microsoft always have generated double-digit percentage increases in quarterly DRAM shipments - until this year, when the roll out of Windows 8 is not expected to generate a significant rise. Global DRAM bit shipments are expected to increase by only 8 percent in the fourth quarter compared to the third, and this lower growth number includes not only DRAM for PCs, but also in smartphones and tablets. Windows 8 is not expected to generate the kind of bump in DRAM shipments seen in the past partly because of its lean hardware requirements."

Micron restructured its IMFS partnership with Intel in 2012. IMFS produces NAND flash memory for both companies. The restructuring gave Micron Intel's remaining 18% interest. IMFS will continue research, development, and production of flash memory. Intel will purchase these products on a cost-plus basis from the partnership. In 2012, Intel provided a $300 million deposit for that company's future purchases. There appears to be little downside for Micron in this agreement.

Bottom Line

Looking forward, Micron will finalize the purchase of Elpida Memory, probably in the first half of 2013. Tokyo District Court approved the acquisition on Oct. 31, 2013. This acquisition will make Micron the second largest manufacturer of DRAM, behind Samsung, a private Korean company. Elpida appears to have a larger piece of the mobile computer industry than Micron, and that should help Micron break more fully into the mobile market. 

Elpida currently supplies DRAM chips to Apple (NASDAQ: AAPL), so this move will give Micron a big foothold in the Apple iPad and iPhone markets. With sales projections for Apple's iPad continuing to grow, this bodes well for the growth of Micron's DRAM market. Find more information about the legal aspects of the Elpida acquisition available here. (This memo also includes an explanation of why the Micron offer was approved over a plan submitted by Elpida bondholders.)

Overall, I'm looking for a strong upturn in Micron once the Elpida acquisition goes through. With the synergistic improvements expected from that purchase, plus the expected settling in the DRAM market, Micron is poised for solid growth.

With average analyst projected earnings for 2014 of $0.62, and a healthy P/E of 15 to 18 restored, I'm looking for Micron to be trading around $9 before 2013 runs its course.


StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Intel, and Microsoft. Motley Fool newsletter services recommend Apple, Intel, and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure