Micron (MU): Bad News is Priced in At These Levels

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Obviously, when major stock indices are flying and frequently hitting record levels, it is a good thing for stock investors. More accurately, it is a good thing for those with existing holdings and those already fully invested. For people with money to invest it is different.

Most are aware that buying high is often not a good idea but feel that they really have no choice. In an ideal world, the answer is to dedicate a portion of their investment to sectors or individual stocks that are lagging the market in the belief that the cyclical nature of markets will cause them to catch up at some point, or at the very least not fall as far when a correction comes.

Usually that hunt for value is a thankless task as underperforming stocks have underperformed for a reason. Sometimes though, underperformance is the result of expectations about the future, and once those expectations are fully priced in a stock can offer good upside with limited downside.

That looks to be the case right now with Micron Technologies (MU).

As you can see, MU has been falling since June, but what is unusual about that is that it has come as the company has grown revenue for nine consecutive quarters, and earnings per share (EPS) for seven of those periods. Clearly it is not performance that has caused the drop, so what is it?

Micron is a chip maker, in their case specializing in DRAM, the memory chips that go into PCs and notebooks among other computer products. Their products are largely commoditized, meaning that they are subject to market forces when it comes to pricing. Think of them as the equivalent of an oil company whose revenue and profits depend on the price of oil in international markets. The market is currently pricing MU in expectation of a big drop in memory prices.

That expectation is reasonable on the surface. As with all commodities, memory prices tend to be cyclical. Higher prices encourage increased production and supply, which forces prices lower again. After a couple of years of increases therefore, it is logical to expect an adjustment. That expectation has been enhanced by a couple of industry-specific things, most recently Intel (INTC)’s announcement that it is experiencing supply problems with its CPUs. That led to Micron cutting their outlook for this quarter.

A drop in Micron is therefore understandable, but it looks overdone, particularly from a long-term perspective. On the call that followed their earnings release last month, Micron CEO Sanjay Mehrota said that they expected a small drop in orders as some of their customers cut their shipment forecasts due to the CPU shortage, but that he didn’t foresee that lasting much beyond the end of the current quarter.

There may be a price adjustment in memory chips, in fact that has already begun, and orders are likely to decline slightly temporarily, but does that justify a drop of over thirty percent in MU that has taken the stock to trailing and forward P/Es of around four and four and a half respectively? No.

This is a case where every possible bit of bad news is priced in, and offsetting factors such as a large stock buyback program that is in place at Micron are being ignored. It is quite possible that as the problems play out the stock could fall a little further, but the likelihood is that before too long it will recover. That prospect makes MU at these levels a very rare thing in the current market: value.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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