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

To: julian hatfield who wrote (24821)	12/6/1997 5:45:00 PM
From: mike iles	Read Replies (1) \| Respond to of 53903

Julian, First, methodology: I take MUEI out of the equation when valuing MU because it's in a different business and there's a significant minority shareholding (so MU can't do what it wants with MUEI's cash). So I deconsolidate the financials and just look at MU's semi business. Some data from the August quarter: sales (including memory sales to MUEI) $483.7M; cost of goods $270.9M; other costs (SGA,R&D) $101.5M; operating income $111.3M; cash,net of debt -$46.5M. They own 60.9 million shares of MUEI. So to do a valuation, I take out the MUEI ($3.17 per MU share with MUEI at $11) which gives you a stock price of $22.58 and a market cap of $4.8 billion. Compare that to latest quarter sales annualized ($1.9B) and you get 2.5X. My 3X number comes from using November quarter sales which I (generously) estimate at $400M ($1.6B annualized). Actually, I think sales will be more like $385M. The rationale for using an estimated sales number is that memory prices have changed a bit since the August quarter and I'm trying to get what the PSR is now. Actually, with 16 Mbit at $3 the run-rate for sales is more like $300M. With costs up in the $390M area you can see why Appleton is moaning about the Koreans. Anyway, the real-time PSR is more like 4X. Why use 1/2x sales?? ... 'cause it gets me to a total value for MU of about $10!!! (gotta to figure out a way to get to single digits). Seriously, it's based on a comment by M. Burke way back that these things bottom out at 1/2 to 3/4 sales. Now , while your chart doesn't show a PSR below 1, I think you're missing something. Go way back and look at the cyclicality of MU's results ... BTW ignore the ROE numbers in my previous post .. got them from MU's annual report and didn't notice that they were based on 3-year moving average .. the following numbers are the actuals. Anyway, in '87 they lost money. The following 2 years they coined it with a 54% ROE in '88 and a 28% ROE in '89. Then supply must have overwhelmed demand and they went thru a 3-year drought, just barely made it into the black and ROE was 1% in each of those years. That's fiscal '90-'92 ... now what was the PSR in that stretch??? I don't know but I would guess it went below 1 for quite a while. If you think it's farfetched going back that far, check out the pattern of results. MU had 3 tremendous years in '94 thru '96 with ROEs of 47%, 57% and 27% respectively. Then down to 8% last year. This year I think they have a good shot at 1% ... deja vue all over again! I think you're right about the WDC comparison ... unfair to MU. They've had a better growth rate and they have a lot higher operating margin. On the other hand when you think of valuations during downturns, survivability is a key issue. WDC has a much stronger balance sheet than MU and doesn't face anything like the capital spending that MU does ... the no-limits poker game. My guess is that as the downturn grinds on the question of MU being able to survive will become more and more of an issue and the valuation will reflect it. What they should do instead of moaning about the Koreans, is take advantage of them, like Dongbu/IBM. Let someone in Korea or Taiwan spend $2-3 billion to put up the fab and MU will provide the process technology and management skills to make it successful. I think they're rightly renowned for their manufacturing skills. They should leverage that, i.e. leverage their intellectual capital (Rambus), not their physical capital. Then I would agree they're not a commodity player. Whew!!! regards, Mike