Skeeter, it's pretty amazing that in the span of under 45 days we've
gone from MU having to entice OEM's with pricing incentives to MU
claiming there will be shortages.
Then again, did the Kipster claim there would be shortages?
Or did he say they would be talking about shortages? <g>
When you rank their "value drivers", the Kipster and the people who
spoon-feed the analytical community and the media could possibly be
#1.
Assume the market is not naive (big assumption) and the market value
is equal to firm value.
Firm Value = Invested Capital* + PV of projected economic profit**.
*IC = Equity + net deferred taxes + Debt
or
current operating assets - non-interest bearing curr. liabs + NPPE +
other operating assets, net
**Per period Economic Profit = Invested Capital X (ROIC - WACC)
Firm Value = $5.9387 bil + PV of projected economic profit
using Q399 #'s 6/24/99 7/30/99
share price 39.375 61.625
MV Equity (using 266.3 shares) 10485.6 16410.7
MV debt (assumes MV=BV) 1658.8 1658.8
MV Equity + MV Debt 12144.4 18069.5
Invested Capital 5938.7 5938.7
PV of future economic profit 6205.7 12130.8
Change in PV future economic profit 5925.2
% change 95.48%
So over the last month, expectations re: the Present Value of Future
Economic Profit have increased 95.48%.
Why?
1) Short-term DRAM prices and the comments of "analysts" and the
Kipster (also known as "Micron Technology's primary source of value
creation").
2) The above feeding into the long-term "change in industry structure
leading to better financial performance" scenario (which I don't
have a problem with). However, this was intact back on 6/24/99.
And of course, the irony here is that MU's ROIC will continue to be
below it's WACC for at least the next several quarters. According to
the economic profit model, the firm will continue to destroy value in
the short-term. So is the change really a reduction in value
destruction assumptions?
I'd be shocked if the % of PV of economic profit accounted for by the
economic profit assumptions over the next 2 years even approached
the 7-8% range of overall PV. And yet it has increased over 95%.
FWIW, my back of the envelop WACC calc. is roughly 15.64% using MV
estimates of Equity and Debt and beta of 2.08, 10-year note yield of
5.9% as the risk-free rate, 5.5% equity risk premium, 8.03% pre-tax
borrowing cost and 39% tax rate.
If ROIC = NOPLAT/IC, what does the NOPLAT have to be in order for the
firm to begin turning an economic profit or the spread between ROIC
and WACC to be positive?
Invested Capital won't stay the same; it will obviously increase. But
for illustrative purposes, hold it constant.
$931 mil. in NOPLAT or roughly $233 mil. per quarter.
When is that going to happen? Under an insanely optimistic forecast
(and I mean INSANELY), Q300 at the earliest.
So based on the above, I therefore suggest an ammendment to the
economic profit model.
Firm Value = Invested Capital + PV future economic profit,
where
PV of future economic profit = PV of realistic economic profit projections + "hype premium"
*can also be called the "tout premium", "the 'THEY' premium", etc.
IMHO, where this firm really excels is in the management of the "hype premium".
It's amazing to watch.
Two conclusions:
Never underestimate the power of the "hype premium".
Theory is great, in real business it's essential, but nailing your
entries and exits ALWAYS trumps theory.
Good trading,
Tom |
