Micron Technology Drops 5% After Morgan Stanley Downgrades Rating

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Jun 15, 2015

In this article, let's take a look at Micron Technology, Inc. (MU, Financial), a $27.18 billion market cap company that provides semiconductor solutions worldwide.

Hedge Funds' Positions

Micron Technology delivered a negative return of more than 31% year-to-date, compared to the SPDR S&P 500 ETF (SPY, Financial), which increased by 1.37% during the same period.

The two largest investors as of the end of the first quarter of 2015 were David Einhorn (Trades, Portfolio)´s Greenlight Capital and Andreas Halvorsen (Trades, Portfolio)'s Viking Global. Both have taken long positions in the stock.

Einhorn holds 33.55 million shares, up by 8% on the quarter. The value of the stake amounts to $910.2 million. In that period, the stock lost 22.51%.

The second largest shareholder of the company is Andreas Halvorsen (Trades, Portfolio), with 31.15 million shares, valued at $844.99 billion, held as of the end of the Q1 2015.

Recent News

Morgan Stanley (MS, Financial) lowered its rating on the stock this morning, and also lower its price target to $21 from $30. On the other hand, according to Yahoo! Finance, the estimated one-year target share price is $37.73, so if you buy shares at current market price ($24.0), your return from price appreciation would be 57%. In addition, you have to consider any cash flow received by the asset. This stock didn´t pay dividends, so the total expected return would be 57%, which we believe it is very attractive.

This past week, other analysts at Keybanc and Pacific Crest have lowered the target price to $32 from $39, but they reiterated their ratings.

Revenues, Margins and Profitability

Looking at profitability, revenues slightly increased by 1.43% but earnings per share had a nice boom in the second quarter compared to the same quarter a year ago ($0.78 vs 0.61).

The company has good margins when compared to the industry. Operating margin is at 21.28% versus 4.97% from the industry. Net margin is almost 23% significantly higher than the industry median of 4.11% and is higher than 93% of the 777 companies in the Global Semiconductor Memory industry.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
MU Micron 35.98
TXN Texas Instruments 28.58
ADI Analog Devices 13.76
 Industry Median 5.15

The company has a current ROE of 35.98% which is higher than the industry median. Also, it is higher than the one exhibit by Analog Devices (ADI, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So, for investors looking at those levels, Texas Instruments (TXN, Financial) could be another appropriate investment option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time. GuruFocus provides this information in the last 10 years:

Year ROE (%)
Aug 05 3.28
Aug 06 5.84
Aug 07 -4.03
Aug 08 -23.24
Aug 09 -33.82
Aug 10 28.52
Aug 11 2.03
Aug 12 -12.76
Aug 13 14.13
Aug 14 30.58

This level is the highest in the last 13 years. The lowest was -33.82% and the median was -2.07%. This is a sign of strength within the company.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 7.7x, trading at a discount compared to an average of 20.80x for the industry. To use another metric, its price-to-book ratio of 2.18x indicates a premium versus the industry average of 1.80x while the price-to-sales ratio of 1.77x is above the industry average of 1.56x. The P/E ratio indicates that the stock is relatively undervalued and subject to a potential buy.

The stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $30,020, which represents a compound annual growth rate (CAGR) of 26.4%.

Final Comment

We believe the company has a good position to achieve revenue growth using the correct technology reducing the cost per bit. However, we think that a principal risk is a lower-than-expected sales of computers remain in the future.

Considering that the stock has plummeted by 5% in today´s session, I think is the right moment to be long Micron because it's a good candidate for a long-term portfolio.

Disclosure: Omar Venerio holds no position in any stocks mentioned