Does Micron’s Share Price Fairly Represent Capital Returns?

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Today we came across Micron Technology Inc. (MU). The current P/E of 4.29 stood out in stark contrast to the much higher multiple of S&P 500 of 20.7x and the 5-year average of 16.5x. So is Micron a value or a trap?

Top and Bottom Line Returns Would Say It’s A value

Micron Technology Inc. (MU) grew top line and bottom line results at double digits during the last two fiscal years.

  • Revenues increased from $12.4 billion in 2016 to $20.3 billion in 2017 and $28.1 billion for the TTM.
  • Gross margins have increased from an average of 23.55% during the last five fiscal years to 41.5% in 2017, 56.4% in the TTM, and guidance between 57% and 60% in 2019.
  • Cash flows from operations has increased from $3.1 billion in 2016 to $8.2 billion in 2017 and $15.5 billion for the TTM.
  • The company currently ranks third in DRAM market share, after Samsung and SK Hynix.

    With Samsung being a more diverse company, SK Hynix provides a better comparison. Profitability and efficiency ratios show a very tight correlation except in one regard, PE. Micron’s PE is lagging 52% behind SK Hynix.

    With all this financial success, why has the share price not experienced similar success?

    A Cyclical, Commodity Business With No New Story

    Micron operates in a highly competitive and cyclical subset of the Semiconductor industry with very little product differentiation. The commoditized memory/storage products make the company vulnerable to both pricing pressure, which usually tracks downward over time, and supply and demand imbalances.

    All of the above suggests a low PE for the overall Semiconductor subset. Yet, why does Micron fall behind its peers?

    Analysts voice concerns Micron continues to fail to expand its products. The company has two major lines, DRAM, which accounted for approximately 64% of total revenue, and NAND, which accounted for 31% of total revenue in the fiscal year 2017. SK Hynix has very similar revenue concentrations to Micron but executes better on the bottom line.

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