RECOMMENDATION-UNDERVALUED STOCK LETTER!Stock Recommendation
Micron Technology (NYSE, MU, 52 week high 38 15/16 low 20 1/16, price 9/30/98 30 7/16,
PE N/A, Mkt Cap 6.48B) Micron Technology, Incorporated in 1978, is located in Boise Idaho
(208 368-4000, www.micron.com) and employs approximately 12,000. The company and its
subsidiaries design, develop, manufacture, and market semiconductor memory products, personal
computer systems, and custom complex printed circuit boards. The company's personal
computers are sold through its 64% owned, publicly traded subsidiary, Micron Electronics. Micron
Electronics sells its PCs using a direct mail order approach similar to that of Dell Computer and
Gateway. Micron's principal competitors in the memory market include Fujitsu, Hitachi, Hyundai
Electronics, Mitsubishi Electric Corporation, NEC Corporation, Samsung Semiconductor, and
Toshiba. Competitors in the personal computer market include Dell Computer, Gateway, Compaq,
Hewlett Packard, and Packard Bell.
The affection afforded Micron stock in early 1995 is nothing short of amazing. Technology
investors lusted after Micron Technology stock and for good reason. At the time, some buy side
analysts on Wall Street were claiming that the company could earn $15 a share! The demand for
Micron's 4MB DRAM memory product skyrocketed and it was all the company could do to keep
pace. At the same time, the company benefited from a stabilization in DRAM prices. Stabilization
of memory chip prices is extremely positive, as there is a continual decline in manufacturing costs
due to efficiency gains. During a period when this relationship holds, memory chip manufacturers
like market leading Micron, benefit nicely. Micron, by producing the memory chip for the lowest
cost, benefited the most during this period and saw its earnings hit an all time high of $3.90 a
share.
Then the unimaginable happened. Micron's Asia competitors flooded the market with memory
products and caused the price to fall almost over night. Micron's stock, after a stunning 18 month
performance, hit the skids and returned to post 1993 levels. Most technology investors lost their
shirts. Undervalued Stock Ideas was fortunate enough to recognize this trend and sell our position
prior to the complete collapse of the DRAM market and, in essence, Micron stock.
Why bother with ancient history?
Undervalued Stock Ideas sees signs that the DRAM market is beginning to stabilize again.
Investors who snap up Micron stock today stand to benefit from an expected powerful upside move
in the stock. Micron shareholders are positioned to receive the added benefit of the anticipated turn
around in Micron's wholly owned subsidiary, Micron Electronics.
Micron Technology announced on June 18 that it will purchase all of the assets of Texas
Instruments' semiconductor memory business for a combination of common stock and assumption
of debt. This purchase adds to Micron's already market leading position in the memory business,
and gives the company access to additional manufacturing capacity.
Another positive development for Micron, which further supports our prediction of a reduction in
the supply of memory chips resulting in price stabilization in the DRAM market, is the decision of
many U.S. companies and a number of Asian competitors to exit the memory chip market entirely.
The U.S. companies include Texas Instruments, IBM, and Motorola. The Asian companies with
plans to exit or which already left the market include Fujitsu, Hitachi, and Mitsubishi Electric.
We foresee an up tick in demand for memory and an increase in memory chip prices. Micron is
poised to benefit from the shift from 16MB of memory to the 64MB DRAM standard in PCs.
Micron, according to its latest quarterly report, expects qualification of 64MB DRAM production
before the end of most current physical year, which ended August 31, 1998. This is an important
accomplishment, as both Dell Computer and Microsoft are aggressively moving toward a 128MB
DRAM standard for PCs. This can only be accomplished by placing two 64MB DRAM products
together. Microsoft recommends that customers use a minimum of 128MB of memory in the
upcoming Windows NT 5.0 software. Dell promises that all of its computers sold by the end of the
year will contain a minimum of 128MB of memory.
According to the Wall Street Journal, a turn around is brewing at Micron's wholly owned
subsidiary, Micron Electronics. The company's new CEO, Joel Kocher, claims that MUEI is the
best kept secret on Wall Street. Mr. Kocher comes to Micron from Power Computing, where he
was president and chief operating officer. Prior to his stint at Power Computer, Mr. Kocher was
the brains behind Dell Computer's direct marketing model. Based on Mr. Kocher's guidance, the
company will appeal to the mid-sized business underdog mentality in its new advertising campaign.
Mr. Kocher is also streamlining Micron's direct order manufacturing process and is reinforcing its
commitment to quality products.
Micron's recent financial performance is nothing to write home about. The company, in its fiscal
year end (August 31st, 1998), lost $1.10 a share on revenues of $3.0 billion. The company blamed
the loss on the decline in the average selling price of 16MB DRAM over the past two and a half
years. The products declined 95% from $3.66 per megabit to 17 cents per megabit. A review of
the balance sheet shows a current ratio of 2.0, cash of $600 million, and inventories of $291
million, down $163 million from one year earlier.
Purchase Micron before the perception changes on Wall Street regarding the price of DRAM
products. If you missed this jewel the first time around, now is your chance to ride the turn around
in MU stock. Micron could earn $1.50 in fiscal 1999, which places a PE of 18 on stock based on
its current price. We recommend purchase at or below $28 and have set a $40 one-year price
target, with a mental stop at 25% below our recommended price. Buy. |
