David Tepper (Trades, Portfolio) on Thursday expressed confidence in Micron Technologies (MU, Financial), the largest position in his portfolio, telling CNBC he was still “very, very long” its shares.
The stock closed 3.18% higher Thursday amid Tepper’s positive comments. Markets have moved in the past in response to statements from the founder of leading hedge fund Appaloosa Management, which has achieved annual returns exceeding 30% since its founding in 1993.
The memory chipmaker, which Tepper called “one of the most historically hated stocks in the world,” is up 1.44% year to date after months of rocky trading and analyst downgrades. Tepper said he also hated the stock previously but cited reasons it has become appealing, including management change and potential for stock buybacks.
The management reforms took place at the top level over the past several years. Micron welcomed a new CEO, Sanjay Mehrotra, in April 2017 and appointed David Zinsner as senior vice president and chief financial officer in February.
Micron announced an ambitious stock repurchase program in May that included authorizing $10 billion in buybacks. Tepper calculated that amount was enough to purchase 20% of the company’s market cap. In the same announcement, Micron said it would devote 50% of free cash flow for return to stockholdings starting in fiscal year 2019, but has generated uneven cash flow in the past. It reported $3.52 billion in free cash flow in 2017 and negative $2.65 billion in 2016.
Micron also has low valuations relative to its industry. The company trades at a price-earnings ratio of 4.35 compared to an industry median of 19.55, placing it lower than 96% of the companies in the global semiconductor memory industry. Its price-book ratio of 1.75 trails the industry median of 1.85 and is lower than 55% of its peers in the industry.
Despite negative market sentiment, Tepper added 5,122,800 shares of the company during the second quarter at his highest-ever average price of $54. As of June 30, he held 40,527,800 shares after buying almost every quarter since the fourth quarter of 2016 when the price averaged just $19. The stake reflects 24.4% of his portfolio and 3.49% of Micron’s outstanding shares.
But other market observers do not share Tepper’s enthusiasm for the stock. It closed 1.63% lower Monday on two major analyst downgrades and a broader decline in markets induced by a new round of U.S.-China tariffs. The downgrades come ahead of Micron’s fiscal fourth-quarter earnings release set for Thursday.
Analysts’ concerns primarily relate to weak pricing in the memory chip market. One analytics company, TrendForce, forecast a 10% drop in the average selling price for NAND flash chips in the third and fourth quarter of 2018. The slowdown is driven by a glut in supply as smartphone and notebook shipments cool and competition intensifies.
NAND chips made up 25% of Micron’s $7.8 billion in revenue in the fiscal third quarter of 2018, rising 14% year over year. DRAM chips accounted for 71% of revenue, up 56% year over year. Shipment quantities were both “relatively flat,” according to the company, placing increased pressure on pricing to boost revenue.
For the fiscal fourth quarter, Micron has guided for revenue in a range of $8.0 billion to $8.40 billion, an increase from $6.14 billion in the fourth quarter last year. It expects diluted earnings per share within 7 cents of $3.30, above last year’s $1.99 per share.
