Welcome to the Stock of the Day.
Nowadays, many of our most beloved gadgets (computers, mobile phones, etc.) are powered by integrated circuits, also known as microchips. So today we’re going to look at Micron Technology (MU), one of the largest producers of memory chips in the world. Shares are up nearly 10% today on strong Q1 results, but let’s see if this company can keep up the momentum in 2014.
Micron Technology is only 35 years old, but in the semiconductor industry, that’s ages. In the dark ages, Micron Technology’s single product was a 64 kilobyte memory card that could only contain the amount of information that is in half of a newspaper.
Over the years, the company has expanded the capacity of its memory chips hundreds of thousands of times over and has broadened out into chips that can power a whole host of products. Currently, the company employs 20,000 worldwide across four continents and brings in almost $10 billion in sales per year. (But analysts expect next year’s sales to jump nearly 68% to $15.21 billion)
After the closing bell on Tuesday, Micron Technology announced better-than-expected results for the first quarter. Robust demand for Micron’s dynamic random-access memory (DRAM) chips drove a 69% jump in revenue compared with the fourth quarter. Compared with the year ago quarter, first-quarter revenue more than doubled to $4.04 billion.
Analysts had forecast $3.76 billion in sales so Micron Technology posted a 7.5% sales surprise. Meanwhile, Micron reported a net profit of $358 million, or 30 cents per share. To put this into perspective, the company had reported a loss of $275 million, or a loss of 27 cents per share a year earlier. Adjusted earnings weighed in at 77 cents per share, which trounced the 53 cents per share consensus EPS estimate by 45%.
One reason that Micron did so well was that it couldn’t have timed its latest acquisition better. Last summer, Micron Technology bought Elpida Memory, including its 300mm DRAM fabrication facility (fab) based in Hiroshima. In addition to a 100% stake in Elpida, Micron now has a 65% ownership interest in Rexchip, including 100% of the capacity of their 300mm DRAM fab in Taiwan.
With these two facilities now under Micron, the company profited even more from rising DRAM prices. Lately, these chips have been in hot demand to power smart phones and tablets, and supply was artificially tight last quarter due to a fire at rival SK Hynix Inc.’s DRAM plant in September. With DRAM products accounting for nearly half of Micron’s revenue in 2013, it is a direct beneficiary of this boom.
Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. This time last year, MU had settled into sell territory. However, this stock is proof of just how much can happen in a year.
Starting in early 2013, institutional buying pressure rebounded for this Moderately-ranked stock, so MU now receives an A for its Quantitative Grade. Meanwhile, Micron has made progress in turning around its balance sheet. The company currently receives As for sales growth, earnings momentum, earnings surprises, analyst earnings revisions and cash flow.
However, there is room for improvement in terms of operating margin growth, earnings growth and return on equity. So MU receives a B for its Fundamental Grade but is still strong overall.
Bottom Line: As of this posting I consider MU an A-rated Buy.
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