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One Big Reason to Buy WDC Instead of Micron Stock

Micron might have more growth, but WDC stock’s got one big advantage over MU stock -- and it’s not dividends

Micron stock - One Big Reason to Buy WDC Instead of Micron Stock

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Last August I wrote about Micron Technology Inc. (NASDAQ:MU) and how it was becoming a more diversified, stable business. As a result, I thought the $36, 12-month target price for Micron stock set by Morgan Stanley (NYSE:MS) analyst Joseph Moore around the time of my article was more than doable.

MU stock actually hit $36 in less than a month, on Sept. 15, 2017, and it’s up 91% through March 22; it really hasn’t traded below its $36 target price in the 12 months since.

Sometimes, analysts do get it right. Kudos to Moore for nailing the call. Currently, he’s got a “Buy” rating on MU stock and a $54 price target.

A month after I wrote my Micron article, I upped my own target for MU stock to $50 by Sept. 18, 2018. It almost hit $50 in November — reaching a high of $49.88 on Nov. 24 — only to retreat into the low $40s, before crashing through the half-century mark in early March.

Which is the Better Buy?

My InvestorPlace colleague, Laura Hoy, just happened to cover this very subject. She came to the conclusion that Micron was the better bet over Western Digital Corp (NASDAQ:WDC) given that its growth trajectory is much higher and its position within the memory chip space more secure.

Don’t get me wrong, Hoy was mostly complimentary about WDC, suggesting the company’s diversified revenue sources make it less susceptible to the commoditized nature of the sandbox in which both companies play.

But like I said, Hoy’s take is that Micron’s got more upside should the memory space continue to thrive. I would tend to agree. However, before plunking down your hard-earned dough on Micron stock, consider the Holy Grail of investing: free cash flow.

A quick run of the numbers shows Micron with $5.2 billion in TTM free cash flow and an enterprise value of $69.5 billion compared to $3.6 billion in free cash flow and an enterprise value of $35.6 billion for WDC.

That’s an FCF yield of 7.5% and 10.1% for Micron and Western Digital respectively.

So, the question you have to ask yourself is whether Micron stock, which is up 139% over the past year compared to 43% for Western Digital, is worth a multiple of 13 times FCF when you can pay 10 times FCF for WDC stock plus the added bonus of a 2% dividend yield.

Remember, cash is king.

Bottom Line on Micron Stock

Last summer, I wouldn’t have hesitated to answer this question. Now, I’m not so sure. Analysts have been pushing Micron’s annual earnings estimates higher in recent months — three months ago its fiscal 2018 EPS estimate was $9.68; it’s now $10.34 — so it’s not a mystery why 25 out of 31 analysts have a “Buy” rating on Micron stock. 

Going with my gut, I see value stocks taking over in the second half of 2018. For this reason, Western Digital stock has more upside potential over the next 6-12 months.

That said, if you own Micron stock, I wouldn’t sell. I am merely speaking to those investors considering one or both of these investments.

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


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/big-reason-buy-wdc-micron-stock/.

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