With shares of Micron Technology (NASDAQ:MU) trading at around $12.91, is MU an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
Micron is moving closer to acquiring bankrupt Elpida Memory. This acquisition will make Micron the second-largest memory chip maker in the world. This might be exciting, but bigger isn't always better, especially when there is a steep cost. The good news is that the cost has declined due to yen depreciation. However, the cost is still over $2 billion. While this acquisition might make Micron a stronger competitor in the space, especially because of mobile technology being acquired, this is still a hefty cost for Micron. It's important to keep in mind that while almost all investors get excited about an acquisition, the majority of acquisitions fail. If this was to happen in this case, and Micron was worse off than prior to the acquisition, it would be an ugly situation.
Currently, Micron has a profit margin of -13.97 percent. On the other hand, operational cash flow is $1.61 billion, which is a big plus. As far as revenue and earnings are concerned, there were significant declines in 2012. Micron has only reported profits in two of the last five years – 2010 and 2011. The last four quarters have been losses, and those losses have widened over the last two quarters on a sequential basis. However, revenue showed a moderate improvement last quarter on a sequential basis.
The PC market has weakened, and the macroeconomic environment has played a big role. The latter point is interesting because Micron management expects the supply and demand picture to be strong through 2014. This is only possible if the macroeconomic environment improves. As we all know, Wall Street is performing better than Main Street, which has had a lot to do with cost-cutting and buybacks in order to improve earnings. Not many industries are seeing improved demand. That said, perhaps Micron management is correct due to the popularity of tablets and smartphones.
On the positive side for Micron, there has been increased efficiency in cost of production and manufacturing. Micron has also outperformed Rambus (NASDAQ:RMBS) and SanDisk (NASDAQ:SNDK) by wide margins over the past three years. Rambus should be completely eliminated from investor consideration as it trades at 39 times earnings and has a profit margin of -49.09 percent. Ouch! SanDisk is trading at 12 times earnings and has a profit margin of 9.05 percent. SanDisk also has an ROE of 6.54 percent whereas Micron has an ROE of -12.95 percent. Despite having underperformed Micron over a three-year time frame, SanDisk looks to be the most logical option based on fundamentals.
Getting back to Micron specifically, the company culture is average, but leadership is above average. According to Glassdoor.com, employees have rated their employer a 3 of 5, 52 percent of employees would recommend the company to a friend, and 83 percent of employees approve of CEO Mark Duncan.
Let's take a look at some important numbers prior to forming an opinion on this stock.
T = Technicals Are Strong
Micron has outperformed its peers for every time frame listed below.
| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| MU | 19.32% | 103.6% | 118.1% | 44.57% |
| RMBS | 7.62% | 77.00% | 77.37% | -53.61% |
| SNDK | 3.84% | 36.62% | 65.31% | 33.25% |
At $12.91, Micron is trading well above its averages.
| 50-Day SMA | 10.92 |
| 200-Day SMA | 8.74 |
E = Equity to Debt Ratio Is Normal
The debt-to-equity ratio for Micron is close to the industry average of 0.20.
| Debt-To-Equity | Cash | Long-Term Debt | |
| MU | 0.46 | 2.23B | 3.65B |
| RMBS | 0.48 | 214.83M | 151.49M |
| SNDK | 0.24 | 3.31B | 1.72B |
E = Earnings Have Been Weak
Hype can drive a stock price higher, but the bottom line for Micron hasn’t been impressive. Revenue also declined in 2012.
| Fiscal Year | 2008 | 2009 | 2010 | 2011 | 2012 |
| Revenue ($) in millions | 5,841 | 4,803 | 8,482 | 8,788 | 8,234 |
| Diluted EPS ($) | -2.10 | -2.29 | 1.85 | 0.17 | -1.04 |
The quarterly earnings situation doesn’t inspire much confidence.
| Quarter | May. 31, 2012 | Aug. 31, 2012 | Nov. 30, 2012 | Feb. 28, 2013 |
| Revenue ($) in millions | 2,172 | 1,963 | 1,834 | 2,078 |
| Diluted EPS ($) | -0.32 | -0.24 | -0.27 | -0.28 |
Now let's take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
Conclusion
Micron has more upside potential for a trade, but capital preservation has always been a priority in this column. Therefore, Micron can't be recommended until more operational improvements have been made. Another factor is rising interest rates, which will eventually have an effect on the stock market. When this happens, Micron will be highly susceptible to broader market downside momentum.
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