Stock pick: Assessing Micron versus its peers in the memory space

Market Realist

Must-know overview of Micron Technology: A DRAMatic growth story (Part 8 of 8)

(Continued from Part 7)

Micron and its peers

We compared Micron with its competitors in the semiconductor space, such as Sandisk (SNDK) and Intel (INTC), and entrants to the SSD space like Western Digital (WDC) and Seagate (STX). Micron’s main competitors in the DRAM space are the Korea-based Samsung and SK Hynix. In terms of multiples, Micron’s P/E ratio is in line with its peers, but its forward P/E is lower than the average. Micron has the highest profit margins and free cash flow yield compared to its main peers.

Micron comps

In January, Micron said it entered into privately negotiated transactions to repurchase convertible debt worth $407 million. Management noted in its release, “We eliminated approximately 10 million shares from our current dilutive share count, assuming a $23 stock price, and reduced the outstanding principal amount of our debt by approximately $164 million. Since last November, we have reduced the dilutive effects of our convertible notes by approximately 52 million shares based on a $23 stock price.”

David Einhorn’s Greenlight Capital acquired a large position in Micron in the fourth quarter of 2013. Its investment thesis said, “MU and its competitors have signaled that they will refrain from adding capacity and will instead prioritize economic value-add. For the first time in memory, MU intends to use its excess cash flow to shrink the outstanding share count rather than build new factories. We believe the company will approach $4 per share of earnings and free cash flow in calendar 2014, and should enjoy a better multiple as investors begin to appreciate the new dynamic.”

Analysts are currently bullish on the stock, with Drexel Hamilton analyst Rick Whittington expecting the stock to double by next year on the back of higher pricing and margin trends. The analyst expects DRAM pricing to remain stable and for minimal industry capacity additions this year, resulting in higher earnings, an improving balance sheet, and greater share upside potential.

In the first part of this series, we worked out assumptions based on Wall Street analysts’ consensus estimates for margins, capital expenditure, and revenue. We believe Micron Technology is fairly valued at present.

To learn about other key players in the technology space, check out Market Realist’s Tech, Media & Telecom page.

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