Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Micron Only Forum -- Ignore unavailable to you. Want to Upgrade?

To: Skeeter Bug who wrote (47438)	8/1/1999 9:16:00 PM
From: Thomas G. Busillo	Read Replies (1) \| Respond to of 53903

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