Given the extremely low valuation of Micron Technology (NASDAQ:MU) stock, if value investing legend Benjamin Graham was alive today, he would be buying MU stock by the boatload.
Trading at 3.7 times its trailing adjusted earnings per share, Micron stock is the third-cheapest S&P 500 company by this valuation metric and it has the lowest forward price-earnings ratio in the S&P 500.
Four months ago, MU stock was trading around $65, over 40% higher than its current price. Its cash return [defined as free cash flow plus net interest expense divided by enterprise value] is 15.5%. By comparison, Amazon.com’s (NASDAQ:AMZN) cash return, according to Morningstar, is 1.0%.
I’m not suggesting that MU is in the same league as Jeff Bezos and company, but it would be difficult to picture a situation that is better suited for a company to buy back its own shares, even though its business conditions.are deteriorating
Warren Buffett Loves Buybacks
“Many management (teams) are just deciding they’re gonna buy X billions (in stock) over X months. That’s no way to buy things. You buy (things) when (they’re) selling for less than they are worth,” Buffett told CNBC in 2015. “It’s not a complicated equation to figure out whether it is beneficial or not to repurchase shares,” he added.
I’ve said it a million times.
Share repurchases are generally a bad idea, not because there are better uses for free cash flow, but because CEOs and CFOs have no clue what they’re doing when it comes to pulling this particular capital allocation lever.
“Henry Singleton, founder of Teledyne — one of America’s most successful conglomerates — used share repurchases with military-like precision to grow his company,” I wrote in 2012. “When shares were expensive, he used shares to acquire companies; when they were cheap, he repurchased them. There was no middle ground for Singleton, and the strategy worked flawlessly.”
Micron CEO Sanjay Mehrotra needs to channel Henry Singleton and start buying back MU stock in massive quantities.
What’s the Intrinsic Value of MU Stock?
I have no idea. Nobody does. Not even Omaha’s greatest investor. All one can do is approximate that number using discounted cash flow or whatever method you use to value a company’s future cash flows.
I’ve never been someone who relies on this kind of number crunching. Instead, I use a stock’s past to figure things out. It’s unscientific, I’ll grant you, but over the long haul, it seems to work.
Anyway, according to InvestorPlace’s Vince Martin, Micron is buying back $10 billion of its stock or 18% of its float.
“Repurchases are coming quickly, the company noted on its Q4 conference call. Micron is spending at least $1.5 billion in Q1 on scheduled buybacks of MU stock and has more available for “opportunistic” purchases,” Martin wrote in an article published on September 26. “Those buybacks could provide some near-term support to MU stock, while also reducing the float and helping raise its EPS,” he stated.
How Much MU Stock Should You Buy?
Micron’s all-time high is $97.50, which it hit in July 2000. As of August 31, 2000, it had $2.5 billion in cash and liquid investments, $934 million in long-term debt, and free cash flow of about $900 million.
As best I can tell, it didn’t repurchase any of its stock in fiscal 2000, which is a good thing given the price of MU stock at the time.
In fiscal 2017, MU repurchased $956 million of MU stock at an average price of $19.50 per share, well below its current price. Those purchases were very well-executed.
Buying the shares at prices north of $40 might seem like a bad idea, but when you consider that Micron’s free cash flow in 2018 is double what it was last year, it’s not a bad proposition, especially if MU stock advances towards the $80 price target set by several analysts.
The Bottom Line on MU Stock
Martin’s contention that MU stock will likely move higher in the months ahead despite its business slowing over the longer term makes a lot of sense. That’s because, even at eight times earnings, Micron stock is incredibly cheap.
Since Micron’s annual free cash flow exceeds $7 billion, the time to act is now.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
