Micron Technology, Inc. (MU) Stock Isn’t the Value Buy Many Think It Is

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Micron Technology, Inc. (NASDAQ:MU) stock is on a roll, one that doesn’t appear ready to end anytime soon. However, before you spend your paper profits, you might want to consider whether MU stock is the value play everyone thinks it is.

Micron Technology, Inc. (MU) Stock Isn’t the Value Buy Many Think It Is

The shares have been on a tear for the past two years delivering 55% in 2016 and 44% so far in 2017 through July 25. A lot of that has to do with Micron’s earnings growth.

At the end of June, it announced third-quarter earnings that beat analyst expectations for the eighth consecutive quarter. Still, despite the gains made by MU stock the past two years, it’s trading at an unbelievably reasonable 5.3 times Micron’s 2018 earnings estimate of $5.85. 

Along with a “buy” rating from 24 out of 31 analysts covering MU stock, this naturally has investors expecting more gains in the second half of the year and into 2018.

Naturally.

Is It A Value Play?

By its forward P/E, it sure is a value play, but that’s not the only multiple you can use to make this determination.

For example, based on its Q4 2017 revenue guidance of $5.9 billion at the midpoint, MU will generate full-year revenue of $20.1 billion for a price-to-sales ratio of 1.7, which is higher than its five-year average. 

A useful metric — though one not often used by investors — is cash return, the amount of free cash flow (adding back interest expense) generated by a business’s enterprise value which is defined as: market cap plus long-term debt less cash.

Morningstar data shows Micron currently has a cash return of 2.7% or $1.1 billion. By comparison, Intel Corporation (NASDAQ:INTC) has a cash return of 7.0%, more than double Micron’s, yet it trades at 11.6 times its 2018 earnings estimate of $2.97.

However, that doesn’t take into account Micron’s fourth quarter, which is expected to be another strong one.

So, if we take its free cash flow through the first nine months of MU’s fiscal year, adding back the $428 million in interest expense, we get $1.9 billion, $3.3 billion higher than in the first nine months of 2016.

Assuming Micron maintains the free cash flow growth (adding back $571 million in net interest expense) it’s had through the first nine months of 2017; it should be around $1 billion for the entire year or a cash return of 2.5%.

If I’m wrong and free cash flow plus net interest is double that, or $2 billion, the cash return jumps to 4.9%, still much less than Intel’s and Texas Instruments Incorporated (NASDAQ:TXN) at 5.3%.

What About Multiple Expansion?

InvestorPlace.com’s Tom Taulli makes some excellent points in his July 5 article why Micron’s P/E ratio is deserving of a little multiple expansion.

The most important being that the supply-demand situation continues to work in its favor with the supply of DRAM chips expected to grow 15% to 20% over the next year with demand slightly above that which should keep prices higher than normal.

 

Also, Taulli reminds investors that Micron’s business is far more diversified today than in years past, generating revenue from four different operating segments. The implication being that as a result of this diversification, historical multiples don’t apply.

Bottom Line on MU Stock

Back in June, I recommended that investors strike while the iron’s hot because the window of opportunity to make money on MU stock might close by the end of the year.

I think Micron’s stock is probably trading at fair value, perhaps leaning slightly to undervalued given its record revenue and gross margins.

However, anyone who thinks the shares are dirt cheap is forgetting its cash return is nothing to write home about.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/micron-technology-inc-mu-stock-isnt-the-value-buy-many-think-it-is/.

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