This article was originally published on Simply Wall St News
Micron Technology, Inc. ( NASDAQ:MU ) is a US$89.6b Market Cap stock with a 21.5x Price to Earnings ratio. When analyzing Micron, we want to see if this price is justified based on current market conditions, industry comparison and the company's growth capacity.
Micron Technology certainly has been doing a good job lately, as it's been growing earnings more than most other companies.
It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. In fact, the expected earnings growth is 23.9% annually. This will add on nicely to the already profitable Micron which currently has US$4.1b in earnings, amounting to a 16.2% profit margin.
Given that, let's compare Micron's profits, to those of the US Market and the semiconductor industry in the chart below.
Keen to find out how analysts think Micron Technology's future stacks up against the industry? In that case, our free report is a great place to start .
It is great to see that Micron is a money making company, whose P/E of 21.5x is positioned below the industry P/E of 33.8x.
The US Market P/E is also not far below with 19.3x P/E, making Micron's trading price close to the US market.
Is There Enough Growth For Micron Technology?
If we review the last year of earnings growth, the company posted a terrific increase of 79%.However, this wasn't enough, as the latest three-year period has seen a very unpleasant 65% drop in EPS in aggregate. This may be mostly due to the cyclical demand of Micron's products.
As investors might be aware, semiconductor parts are currently in high demand and this gives producers an opportunity to increase their profit and output, which is great for Micron.
We can also see that the general capacity utilization of the semiconductor industry is trending upwards, which gives us a foundation upon which e can base our future earnings growth estimates.
Board of Governors of the Federal Reserve System (US), Capacity Utilization: Manufacturing: Durable Goods: Computers, Communications Equipment, and Semiconductors (NAICS = 3341,3342,3344) [CAPUTLHITEK2S], retrieved from FRED, Federal Reserve Bank of St. Louis
For investors this signals an opportunity, but we must be weary as companies may ramp up production quicker than expected, thus bringing down the current competitive advantages.
Shifting to the future, estimates from the analysts suggest revenue should grow by 15.4 % per annum vs the 8.4% and 9.4% industry and market growth respectively.
It seems most investors are expecting this strong future growth and are willing to pay more for the stock. Which means that the price already reflects a portion of the expected future growth, and investors should look at the company in its entirety before forming an opinion.
The Final Word
Generally, it is great to find a company with a lower (21.5x) P/E ratio relative to the competition (33.8x), in an industry which is in high demand.
Compared to the market's 19.3x P/E ratio, Micron is not too far off, which shows us that we are not looking at a large level of risk.
The P/E ratio is also backed by estimates of over performing growth vs the market and industry, both for revenues and earnings. This is very important, as investors are paying for earnings that are going to grow in the near future.
Right now, shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat.Unless these conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Micron Technology you should know about.
You might be able to find a better investment than Micron Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.