Micron (NASDAQ:MU) reported its fourth-quarter earnings at the end of September, and they were better than expected on both the top and bottom lines. Despite the positive results, MU stock sunk by more than 11% because MU revealed that its revenue from Chinese telecom tech company Huawei was dropping like a stone.
“In the fiscal fourth quarter, sales to Huawei declined sequentially and were down meaningfully from the levels we anticipated.” Micron CEO Sanjay Mehrotra said on MU’s results conference call.
In May, the U.S. began prohibiting American companies from doing business with Huawei. This restriction meaningfully dented MU’s Q4 results. With the U.S.-China trade war poised to continue for some time, Micron’s pain will probably continue indefinitely.
It doesn’t help that NAND and DRAM prices have cratered over the past year, reducing the company’s profits now and into the future. In 2018, MU reported earnings per share of $11.95. In fiscal 2019, its EPS dropped by almost 50% to $6.35. For Q1, it expects EPS of 39 cents to 53 cents, significantly below its earnings in Q1 of 2019 of $2.97 per share.
While the sky might appear to be falling, Micron stock is still up 40% in 2019. Over the past three years, it’s managed an annualized total return of 35%, so long-time MU shareholders are doing just fine.
And there are still things to like about Micron stock. Here are three positive aspects of Micron and MU stock.
Lots of MU Stock Repurchases
In 2019, Micron repurchased $2.66 million shares of Micron stock. That represents 80% of its $3.33 billion of free cash flow during the year. It has $7.34 billion left on its common stock repurchase authorization.
How has it done on these repurchases?
Between August 2018, and October 2018, it repurchased 15 million of its shares for a total cost of $653 million or $43.53 per share. It hasn’t made any money on those share repurchases.
Through the first nine months of fiscal 2019, it repurchased 67 million shares of MU stock at an average price of $39.70 per share. Over the last year, it’s made a paper profit of almost 10% on those repurchases. It did not repurchase any of its stock in Q4.
Despite those mixed recent results, I believe that a company like Micron, which generates cyclical free cash flow, ought to be buying its own stock when it has the money to do so. Furthermore, as I noted in June, MU has a good overall record when it comes to buying back MU stock.
As Micron’s free cash flow continues to shrink, it obviously will have to be more judicious about its share repurchases.
Although I’m skeptical about most companies’ ability to repurchase their shares efficiently, semiconductor stocks ought to buy their own stocks while their businesses are doing relatively well.
MU Has Paid Down Its Debt
Not only did Micron repurchase 7% of its shares in fiscal 2019, but it’s also managed to cut its debt over the past few years.
This year, as a result of the decline of its free cash flow, Micron wasn’t able to reduce its net debt. It ended up adding a net total of $210 million in long-term debt to its balance sheet.
However, in fiscal 2018, the company reduced its long-term debt by $9.2 billion.
As a result, it cut its interest expense for the year by 60% to $222 million versus $560 million a year earlier.
In August 2017, Micron had net debt of $5.1 billion. A year later, it had net cash of $214 million. By the end of 2019, it had an astounding $3.2 billion of net cash on its balance sheet, 15 times higher than its net cash a year earlier.
With its business facing some serious headwinds in fiscal 2020, its decision to reduce its debt in FY18 leaves it better positioned for the future.
Although repaying debt might seem like a conservative move on the company’s part, if a global recession rears its ugly head, the owners of MU stock are going to be very thankful that CEO Sanjay Mehrotra took this approach.
Micron’s financial position hasn’t been this good in years.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
