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Omar Venerio
Omar Venerio
Articles (913) 

David Einhorn Continues to Add Micron Technology to His Position - Should You?

The stock plummeted 30.5% in the second quarter

September 16, 2015 | About:

Let's take a look at Micron Technology Inc. (NASDAQ:MU), a $27.18 billion market cap company, which provides semiconductor solutions worldwide. The stock delivers a negative return of more than 52% on a year-to-date basis. This crash is alarming for me, but it seems that some hedge fund managers take the opposite direction. Perhaps the reason behind this bullish sentiment is the fact that the stock has outperformed the market in 2013 and 2014.

Bullish sentiment

The two largest investors as of the end of the second quarter of 2015 were David Einhorn (Trades, Portfolio)´s Greenlight Capital and Seth Klarman (Trades, Portfolio)´s Baupost Group.

Although the stock plummeted 30.5% in the second quarter, Einhorn has increased the stake by 14% in the quarter to 37.95 million shares, the value of the stake amounts to $714.97 million.

The second largest shareholder of the company is Seth Klarman (Trades, Portfolio), who maintains his position intact, with 19.7 million shares, valued at $371.26 billion, held as of the end of the Q2 2015.

DRAM market

Micron is a commodity producer of DRAM, but it is transforming into a producer of more high-end products. Despite this, the firm should benefit from a higher demand in mobile DRAM. Although, we believe in mobile DRAM opportunities for the future, the company´s earnings volatility is still high. But according to its valuation metrics, the stock is undervalued. It sells at a trailing P/E of 5.5x, trading at a discount compared to an average of 17.5x for the industry. To use another metric, its price-to-book ratio of 1.43x indicates a discount versus the industry average of 1.45x while the price-to-sales ratio of 1.17x is below the industry average of 1.31x. We must mention that the forward P/E is higher than trailing P/E, which means that the earnings are in decline.

Earnings volatility

Looking at profitability, revenues decreased by 3.24% and led earnings per share declined by 38% in the second quarter compared to the same quarter a year ago (42 cents vs. 68 cents). During the past fiscal year, the company increased its bottom line. It earned $2.55 versus $1.00 in the previous year. This year, Wall Street expects an improvement in earnings ($2.67 versus $2.55).

Final comment

We still believe the company has revenue growth potential using the correct technology while reducing the cost per bit. At current levels, Micron seems to be a nice bet, but the company faces the risk of lower-than-expected sales of computers or the incapacity of making the cost reductions.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

Omar Venerio
Omar Venerio is capital markets, derivatives, corporate finance and financial management professor. He is passionate about the stock market and providing independent fundamental research and hedge fund and insider trading-focused investigation.

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