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Micron Technology Weakness Paves Way to Higher Return 

One of my favorite large-cap chip stocks with above-average return prospects is Micron Technology, Inc. (NASDAQ:MU).

The trade war with China has pressured many of the technology companies that sell some key technologies to Chinese technology companies.

But my sense is that these are temporary issues, which will eventually be worked out, as there is simply little chance technology companies can be shut out of the massive and growing Chinese technology market.

The shares of Micron have been under pressure, down 12% over the past month and off 31% from the record high of $64.66 in May 2018.

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Chart courtesy of StockCharts.com

But on a year-to-date basis, MU stock has easily outperformed both the Nasdaq and S&P 500 with a 40.4% gain.

Micron is a “best of breed” player in the manufacturing of memory solutions, such as the high-performance solid state drive (SSD) along with dynamic random access memory (DRAM), NAND flash memory, NOR flash memory, hybrid memory cube, multi-chip packages, and memory cards.

Why MU Stock Will Recover

After a revenue decline in fiscal 2016, Micron came back with growth in fiscal 2017 and fiscal 2018 prior to a decline in fiscal 2019.

Fiscal Year Revenues (Billions) Growth
2015 $16.2  —
2016 $12.4 -23.4%
2017 $20.3 63.9%
2018 $30.4 49.6%
2019 $23.4 -23.0%

(Source: “Micron Technology,” MarketWatch, last accessed October 11, 2019.)

The revenue contraction for MU is expected to continue in fiscal 2020, with revenues declining an estimated 11.4% to a consensus $20.73 billion. But there’s a high estimate of $24.0 billion.

For fiscal 2021, Micron is slated to ramp up revenues by 21% to $25.1 billion, with a high estimate of $30.6 billion. This is up 47.6% versus the fiscal 2020 consensus. (Source: “Micron Technology, Inc. (MU),” Yahoo! Finance, last accessed October 11, 2019.)

Micron produced positive earnings before interest, taxes, depreciation, and amortization (EBITDA) in the last five straight years, including strong growth in fiscal 2017 and fiscal 2018.

Fiscal Year EBITDA (Billions) Growth
2015 $5.6  —
2016 $3.2 -42.9%
2017 $9.7 203.6%
2018 $19.7 102.2%
2019 $12.9 -34.5%

(Source: MarketWatch, op. cit.)

As far as profitability goes, MU has largely been delivering profits on a generally accepted accounting principles (GAAP) and adjusted basis.

Fiscal Year EPS Growth
2015 $2.47  —
2016 -$0.27 -110.9%
2017 $4.41 1,733.3%
2018 $11.50 160.8%
2019 $5.67 -50.7%

(Source: MarketWatch, op. cit.)

A positive is that the earnings-per-share (EPS) trend has been moving higher over the past 90 days.

But, just like revenues, MU is estimated to report lower adjusted EPS of $2.54 per diluted share in fiscal 2020, versus $6.35 per diluted share in fiscal 2019. Micron is expected to ramp up earnings to a consensus $5.34 or as high as $8.75 per diluted share in fiscal 2020. (Source: Yahoo! Finance, op. cit.)

Micron delivered positive free cash flow (FCF) in each of the last five years, with the exception of fiscal 2016. The positive FCF will allow for CapEx.

Fiscal Year FCF (Billions) Growth
2015 $1.2  —
2016 -$2.6 -323.2%
2017 $3.4 229.1%
2018 $8.5 149.2%
2019 $3.3 -60.9%

(Source: MarketWatch, op. cit.)

Analyst Take

Micron stock trades at a cheap 5.10 times its high EPS estimate for fiscal 2021. This valuation is cheap by any standard.

Progress in the China trade situation, especially with technology companies, will give an immediate boost to MU stock.

In the meantime, take the current opportunity to accumulate Micron stock on weakness.

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