In this article, let's take a look at Micron Technology, Inc (MU, Financial), a $31.74 billion market cap company, which is a manufacturer of semiconductor memory products, including DRAM and NAND flash memory, as well as image sensors.
Manufacturing technology
The company is a top supplier and manufacturer of memory chips. Searching for reducing the size of their products, the company's corporate strategy focuses on manufactureing smaller and more dense memory chips. Also, they are more attractive to customers. Moreover, those advances lead to cost reductions, helping to gain profitability.
We must not forget that the semiconductor industry is highly capital intensive so it is required large investments. Equipment must be replaced in a three to five years period.
Long-term profitability
The long-term profitability will be threatened by strong competition. So, maintaining market share in good levels, while moving to faster-growing segments, is key for the company.
Micron has made several agreements, in the form of joint ventures, with giant companies like Intel Corp. (INTC, Financial), Cannon Inc. (CAJ, Financial) and Hewlett-Packard Corp. (HPQ, Financial).
DRAM segment
With the DRAM business, Micron derives almost a third of its annual sales. It doubled the business some years ago with the $2.5 billion acquisition of Elpida, which provided scale and better prices.
Revenue growth: NAND
When thinking about a promising business for future growth, we believe NAND will be that option, due to its rapid proliferation as a data storage medium, for example in SSDs, which store information while replacing traditional hard drives.
Revenues, margins and profitability
Looking at profitability, revenue growth by almost 72% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.68 vs $0.04). During the past fiscal year, the company passed from a negative to a positive performance by earning $1.00 versus -$1.04 in the year before. This year, Wall Street expects an improvement in earnings ($3.21 versus $1.00).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| MU | Micron | 36.25 |
| TXN | Texas Instruments | 22.07 |
| AVGO | Avago Technologies Ltd | 9.68 |
| INTC | Intel | 17.39 |
| Â | Industry Median | 3.76 |
The company has a current ROE of 36.25% which is ten times higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment, Micron exceeds those levels.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 9.9x, trading at a discount compared to an average of 82.4x for the industry. To use another metric, its price-to-book ratio of 3.2x indicates a discount versus the industry average of 2.07x while the price-to-sales ratio of 2.4x is above the industry average of 1.84x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $44.816, which represents a 35% compound annual growth rate (CAGR).
Final Comment
As outlined in the article, we believe Micron has solid fundamentals in order to expand sales, improve margins, and maintain a healthy return on investment. Moreover, the PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like John Burbank (Trades, Portfolio), Julian Robertson (Trades, Portfolio), Ken Heebner (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), George Soros (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Whitney Tilson (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Caxton Associates (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and RS Investment Management (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
