I am not one to push my luck. I was taught early in my days in the foreign exchange market that greed is a terrible sin for a trader. Dave, my first boss, taught me to always leave some meat on the bone for the next dog, and that you’re never wrong to take a profit. It is only natural, then, that when a stock I recommended here in July is up close to 100% and up over 200% from when I first talked about it in 2012 , I start to look for reasons to take a profit. In the case of Micron Technologies (MU), I can’t find any; in fact it still looks like a decent buy to me, even given that huge rise.
As I said, I started by looking for reasons to suggest that the upward momentum for MU was over, but concluded otherwise. I always try to keep an open mind when I look at a stock, and sometimes my conclusion surprises me. When you look at a 1 Year chart like this, it takes some convincing that there is still further to go.
Micron Tech stock chart
Valuation, however, has nothing to do with the stock’s performance compared to previous pricing. It is about the value the market assigns to a company as a whole, based on its earnings; in other words Price to Earnings Ratio, or P/E. There are two types of P/E; trailing, which is the current price divided by the past 4 quarters’ earnings per share, and forward, which is the same calculation, but using analysts’ estimates for the next 4 quarters of earnings. Whichever one you use, Micron still looks cheap.
MU has a trailing P/E of 14.94, compared to an average for the S&P 500 of 17.71 and a forward P/E of around 11, compared to an S&P average of 15.65. In case you think that is just an industry quirk, take a look at two competitors. SanDisk Corporation (SNDK) has trailing and forward P/Es of 17.47 and 12.43 respectively, and struggling American Micro Devices (AMD) has a forward P/E of over 300 and there can be no trailing P/E for AMD as they have not made money over the last year.
That is all fine and dandy, but trailing P/E is now history, and forward P/E is dependent upon analysts’ notoriously unreliable estimates. If the company can’t execute or falters in any way, those estimates will look pretty silly, so what can we expect from MU for the rest of 2014? The outlook, I would say, remains positive.
Micron is in the semi-conductor manufacturing business and derives most of its revenue from computer memory, particularly DRAM and NAND Flash. They are a big supplier to mobile device manufacturers. Surprisingly to some, computer memory is a commoditized market, with prices set by global supply and demand.
This means that a company has no say over what price their finished product is sold at. Memory prices have been dropping significantly over the last few years. DRAM, for example, has seen double digit percentage declines in price in each of the last three years, including a 45% drop in 2012.
Given that, MU’s performance in returning to profitability in that time is quite remarkable, and after such a significant drop in prices, some stabilization at worst can be expected in the memory market. This should leave them ideally placed to build on recent success and continue to make money.
A few years ago, when rival Elpida went bankrupt, the critics were out in force regarding MU’s decision to buy out what was left of the Japanese company. The argument was obvious, if short sighted. Why take on debt and expand as prices are set to fall?
What Micron saw, however, and I and others who were positive on the stock as early as 2012 believed, was that the only ways to counter falling prices are diversification and increased volume. The Elpida purchase enabled Micron to achieve both, and their decision to focus on mobile applications for their products now looks smart.
For a pundit, it is always risky to update a call. Conventional wisdom says that when you get one right you should refer to it only to point out how clever you were and to suggest taking a profit; that way you can’t lose. By talking positively about the stock again when it has appreciated a couple of hundred percent you risk getting that one wrong, and nobody will remember the initial call, just the wrong one.
That is why I started by looking for reasons to sell MU, but in all honesty I cannot recommend selling a stock that has a recent history of excellent execution and profitability in a difficult market, yet still trades at a discount to competitors and the market overall. It may seem strange to say that a stock that has risen 200% in 2 years is undervalued, but it sure looks that way.