Micron: Buyback At The Bottom?

One of Thursday’s biggest losers so far is semiconductor company Micron (MU). As seen in the chart below, shares are down more than 10% so far today to their lowest point in months, after research firm Baird removed the name as a top pick in the large cap semi space. While investors may be selling the news, perhaps it is actually time to buy the beaten down name.

(Source: Yahoo! Finance)

The analyst reiterated a number of concerns that we’ve been hearing regarding Micron for several months now – gross margins nearing a peak, DRAM pricing finally topping out, and NAND oversupply recently worsening. Not only did the analyst remove the name as a top pick, but the price target was lowered from $100 to $75. While that is a substantial cut in valuation, don’t forget that the stock is currently trading below $45 a share! So even with all of the negative parts of the note, the price target still implies more than 68% from current levels.

A couple of months ago, I discussed a similar negative analyst note that actually had some positive pieces to it. This one was from Morgan Stanley, and it mentioned some of the same items referenced above, while including a $65 price target. Despite the stock’s roughly 20% drop since then, let me note the following changes in analyst estimates (fiscal 2018 just finished):

  • Fiscal 2018 revenue average increased from $29.81 billion to $30.21 billion, currently implying 48.6% growth.
  • Fiscal 2018 EPS average increased from $11.53 to $11.77, currently implying 137% growth.
  • Fiscal 2019 revenue average increased from $31.35 billion to $32.69 billion, currently implying 8.2% growth on top of fiscal 2018 increase.
  • Fiscal 2018 EPS average increased from $10.84 to $11.60, currently implying a 1.4% decrease, but much less than 6% decrease that was previously forecast.

The other major item to consider now that we are in fiscal 2019 for Micron is the company’s significant buyback program. Back in May, the board of directors announced plans to return at least 50% of free cash flow to investors starting in the new fiscal year, highlighted by up to $10 billion in authorized share repurchases. At $60 a share, Micron had a market cap just under $70 billion, but at current levels the valuation is just $52 billion. That means that the buyback will be much more powerful, helping support earnings per share quite a bit.

Micron investors are again faced with a decline in the stock based on a negative analyst note. However, much of the concerns are just a repeat of prior items, and the firm’s price target represents significant upside from here. Analyst estimates have risen a bit in recent months, and with the new fiscal year starting recently the soon to start buyback will be a lot more powerful. Perhaps this is a time to buy Micron on the dip.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.

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Joan Guzman