Last night Samsung, the Korean electronics giant, posted Q4 results. The assumption was that the most interesting thing about those results would be the effect of the recall of the Galaxy Note 7, which showed an alarming tendency to catch fire. Analysts were curious to see not just the financial effects of such a massive recall, but also to what extent the scandal tarnished the Samsung brand and affected other business units.
The answer, it seems, was hardly at all.
Samsung absorbed the recall costs and reported a $7.9 Billion operating profit, up fifty percent from the same quarter last year. The fact that Samsung’s chip business was a leader in beating expectations, though, was of most interest to me, and it suggests that the recent pullback in an old friend of a stock, Micron Technologies (MU), may be a great buying opportunity.
It can, at times, be a big mistake to assume that because one company in an industry reports good or bad results that others in the same business will necessarily follow suit. For starters, firms in the same business are, by definition, usually in competition with each other, so one company’s good results can presage the other issuing a disappointing report. In addition, the two companies may have different areas of focus, so the effects of changes in the business will not always be evenly distributed.
However, this case is different.
First and foremost, investors must be aware that computer memory is a commodity rather than a product in the traditional sense. Pricing is set through an international market, leaving the producers in the same situation as oil companies, with no control over what they charge for their product.
As with all commodities, those memory prices are somewhat volatile and respond to changes in supply and demand conditions. Up until a few months ago, as global demand growth slowed, particularly for PCs, the memory market was massively oversupplied, keeping prices low. That situation began to turn around in the middle of last year, however, and the evidence of Samsung’s earnings suggests that things are still looking up.
The best news for Micron, though, is continued strength in the PC DRAM market. After concentrating on the Flash memory used in mobile devices for a while, Micron’s 2013 purchase of bankrupt Japanese rival Elpida put them back in a position where DRAM was important. Tight supply in that market since then has pushed prices up and continues to do so, so the immediate future for Micron looks decent.
From a trade structure point of view, MU also sets up well. The stock gapped upwards after a big beat of expectations on their own earnings last month, but the recent pullback has brought the stock to within around five percent of that level, making it a good basis for a stop loss order. To see a target price we need to broaden the chart out and look at a three year history.
That would indicate that if we break back above the high of a few days ago, around $23.50, then the next stopping point should be around $28.50. That would represent roughly a thirty percent profit which makes the risk/reward ratio of the trade pretty tempting.
Because of the risks inherent in commoditized pricing and the industry’s recent troubled history, chip manufacturers’ stocks typically trade at lower price to earnings ratios that the broader market. Even with that proviso, though, in a market where value is scarce to say the least, Micron, at a forward P/E of around 8 looks like a bargain.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.