No less than eight analysts raised their price 12-month price targets for Micron Technology, Inc. (NASDAQ:MU) after it reported stellar second-quarter earnings Mar. 23. With all the good news in the first two-quarters of fiscal 2017, Micron stock has climbed out of the hole it was in this time last year when it traded below $10.
Up 171.7% over the past 52 weeks through April 5, if you bought Micron stock at the 52-week lows, you’re probably thinking about taking some profits. If you missed this massive move higher, you might be wondering if there’s still time to profit from Micron’s revival.
It’s a conundrum for sure and a big reason why investing is so difficult. You never really know if you’re making the right call until the result is in and your money has won or lost.
The Hype Behind Micron Stock
Simply observing what the analysts have to say about MU stock, it’s almost impossible not to lay down a bet. This time last year only five analysts out of 32 (15.6%) had a “Buy” rating on Micron stock; as of April 5, that’s up to 11 out of 29 or 37.9%. Even better, only two analysts currently have a “Hold’ rating or lower compared to 10 a year ago.
Credit Suisse is so enthusiastic about Micron stock that it raised its 12-month price target to $40 from $35 while maintaining its “Outperform” rating.
“We are raising our fiscal 2017 and fiscal 2018 EPS to $4.09 and $5.25 from $3.26 and $4.03 and raising our price target to $40 from $35,” Credit Suisse said. “While Micron is clearly benefiting from better cyclical pricing, the more important drivers seem more sustainable — mix, cost-downs, and scale efficiencies.”
Credit Suisse analyst John Pitzer projects that MU will generate $4.9 billion free cash flow in fiscal 2017 and $5.3 billion in fiscal 2018. Citigroup is even more bullish, seeing 2018 FCF of $6.0 billion.
Of the eight analysts I referenced at the beginning, the lowest price target is $32 from Goldman Sachs, while the highest is $50 at Needham & Company, much higher than where MU stock currently trades.
It seems the writing is on the wall: Buy now or miss out on a boatload of profits.
Perhaps, but a rational investor always looks at both sides of the argument. Here’s what I’d be concerned about.
MU: Cash Return on Invested Capital
CROIC is defined as free cash flow divided by invested capital [total equity + short-term debt + capital lease obligations + long-term debt].
It tells the story of how effective a company is at generating free cash flow from its invested capital. It’s not so much the actual percentage that you’re concerned about, but rather if it’s heading in the right direction.
The following is the breakdown of MU stock’s CROIC:
Fiscal 2016 = -11.7%
FCF = -$2.65 billion
Invested Capital = $12.08B + $376.0M + $1.03B + $9.15B = $22.64B
Fiscal 2018 = 26.6%
FCF = $6.03B (Citigroup estimate)
Invested Capital = $22.64B
It’s important to note that Micron’s CROIC in 2018 likely won’t be as high as 26.6% because I’ve used the invested capital from 2016. Its invested capital will likely be higher in 2018 because of increased profitability, which would bring the cash return lower although that would be offset by increased debt repayment.
I’m merely using this to illustrate that Micron’s business is seriously improving. Whether it’s enough based on its current valuation is another story altogether.
FCF Yield
Assuming Citigroup’s free cash flow number for 2018 turns out to be accurate, Micron has a forward FCF yield of 19.3% [$5.45/share FCF / $28.26 (April 5 closing price)].
By comparison, over the last 10 years, Micron’s best year for free cash flow per share was in fiscal 2014 when it was $2.75, or half what it will be if Citigroup is correct about its projection. Micron’s 2014 fiscal year ended on Aug. 28; Micron stock was $32.81 at the time giving it an FCF yield of 8.4%.
Bottom Line on MU Stock
If the analysts are right, Micron is a $60 stock, maybe higher in the next 18 months time. Of course, analysts have been known to be wrong and 18 months is a long time in the tech sector.
If you hold MU stock and you’ve doubled your money, I’d be inclined to sell at least half the position; if you don’t own it, I’d consider making a small bet, but nothing you can’t afford to lose. The easy money’s already been had.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
