This article is technically about MU, but there are several mentions and comparisons to WDC. Author feels MU is not getting a fair shake on valuation, just as most of us feel about WDC.
Link: seekingalpha.com
Micron Technology: Investors Still Have Time To Act
Jan.31.18 | About: Micron Technology (MU)
Michael Wiggins De Oliveira
Long only, value, contrarian
Marketplace
Deep Value Returns
Summary
Strong industry tailwinds.
Management is strongly aligned.
Surprisingly Micron is still undervalued.
Investment ThesisMany investors, particularly hard-core value investors would consider an investment in Micron Technology (NASDAQ: MU) as overvalued and having missed the opportunity. I strongly disagree this to be the case. Micro is a rare investment where, in spite of it trading at all-time highs, I still believe it to have a large margin of safety.
BackgroundMicron's Q1 2018 results were nothing short of astonishing. Yet, its shares have languished after Micron’s highly productive and solid set of results. Every one of its reportable segments grew, helping Micron's margins meaningfully expand. Also, management's cost cutting efforts are clearly paying off, as demonstrated by Micron's gross margin increasing to 55% in Q1 2018 compared with just 25% in Q1 2017.
Additionally, there is quite clearly huge demand for intense data analytics workloads, yet the investment community is unwilling to pay a premium for Micron. Incidentally, every company in the Fortune 500 is likely to need some sort of cloud platform in the next few years, yet investors are shying away from fully pricing in any sort of expectation that Micron will be able to monetize this demand.
Further, many blue-chip companies are in significant need of increasing their flash storage solutions, which is likely to continue to drive Micron's near term revenue growth. Even if Micron is not the only company which is able to supply much-needed storage to enterprise, competing against the likes of Western Digitial ( WDC) and Samsung Electronics ( OTC:SSNLF) - with their deep pockets and strong R&D departments - nevertheless, in spite of strong competition, I suspect that over the next 2-3 years, demand will outstrip supply.
Insider AlignmentAdmittedly, insiders don’t have much of Micron's stock. However, these insiders are still very much aligned with Micron’s shareholders through their compensation package. For instance, 50% of management's compensation package is directly tied to the Micron’s profitability; which for FY 2017 Micron certainly delivered and thus management hit the maximum level of compensation. Which is realistic and fair - if a management delivers results like Micron did throughout FY 2017, they deserve to get accordingly paid. Which goes some way to explain why Einhorn's Greenlight has been purchasing significant amounts of Micron. Einhorn is known throughout the hedge fund world for his strong track record and concentrated portfolio.
Peer Group Valuation
Immediately obvious is just how cheap it is compared with its peer group. Firstly, it generates strong and growing free cash flow. For example, a distant peer, AMD ( AMD), inconsistently generates free cash flow and when it does it is paltry relative to its trading valuation. Secondly, Micron has a remarkably strong balance sheet and is truly on a league of its own. Essentially, Micron has stated that it expects to exit FY 2018 with approximately $8 billion of debt, which demonstrates management's commitment to continue with a strong and flexible balance sheet.
In fact, through Micron's earnings call Q&A, CFO Maddock highlighted that Micron’s focus was on bringing down its debt and getting Micron closer to being investment grade, which would not preclude Micron from considering some type of shareholder return program.
Moving on, given that Micron is so heavily shorted, with practically 6% of its stock sold short, patient shareholders might come to see a near-term boost in the share price if, in 3-4 quarters time, Micron initiates a share repurchase program or initial dividend. This would signal to the market that management is confident of its business, thus forcing short sellers to cover their positions.
TakeawayMemory chip manufacturers are in high demand with the whole sector experiencing strong tailwinds. By investing in companies such as Micron, which are highly free cash flow generative with strong balance sheets and aligned management, while not paying large multiples is a winning strategy in the long run.
Note: The only favor I ask is that you click the "Follow" button so I can grow my Seeking Alpha friendships and our Deep Value network.
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