Micron Technology (MU.US) designs, develops, manufactures and sells memory and storage solutions for NAND, DRAM and NOR. As of the end of fiscal 2021 (period ending September 2, 2021), Micron Technology had a dozen manufacturing sites and 14 customer labs around the world. Its manufacturing operations are primarily located in Taiwan, China, Japan, Singapore, Malaysia and the US.
Micron Technology operates in the competitive semiconductor memory market, where price pressures are common and the risk of obsolescence is a reality.
However, the good situation of the company's accounts, the great capacity to generate free cash flow and the good growth prospects supported by the evolution of the sector show resilience to adverse external factors. Micron's upcoming dividend in August is not much compared to the S&P 500 average, but the new payment speaks of increased management confidence in his outlook.
Micron Technology shares rose after publishing its latest earnings report on December 20 (and are now trading at $ 93.90). Analyst valuations put the stock at a potential price of $ 100 per share. Although, as we will see in the conclusion, the price range places the current price close to “overbought”.
The following table highlights which functions are performed where, geographically speaking, in regards to Micron Technology's global operational footprint. For reference, NOR and NAND flash memory solutions are considered non-volatile and do not require a continuous power supply to retain memory. DRAM is another memory solution, although it requires a continuous power supply to function and is considered volatile memory.
Image Source: Micron Technology - Fiscal 2021 Annual Report
The company's manufacturing operations are supported by third-party contracts and its agreements with key suppliers of semiconductor components and equipment. Additionally, Micron Technology prioritizes R&D activities to stay ahead in this incredibly competitive industry. In fiscal 2021, the company spent approximately 10% of its revenue on R&D expenses, and in recent fiscal years, Micron Technology has spent on average 10-12% of its annual revenue on R&D expenses.
Source: Micron Technology - Fiscal 2021 Annual Report
New dividend from Micron!
Micron Technology announced that it was initiating a quarterly dividend starting at $ 0.10 per share in August 2021, with its first payment in October 2021. Until this date, the company paid two dividends in August and December. The company aims to return 50% of its free cash flow (FCF) to investors through dividends and share buybacks. The dividend yield isn't much compared to the S&P 500 average, but the new payment speaks to a greater confidence from management in their outlook for the business.
Regardless of the size of the payment, the good news is the payment of a quarterly dividend, despite industry competition from Samsung, SK Hynix and Kioxia (formerly Toshiba). Such intense rivalries have often resulted in industry overcapacity, price pressures, and painful cycles in the past. Margins need to be watched closely, especially in light of Intel's (INTC.US) entry into the war and the Western Digital-SanDisk (WDC.US) joint venture.
Most bullish on Micron's history point to a more rational memory market, supported by recent and pending industry consolidation. However, high-volume production memory products are generally marketed and manufactured to industry specifications. There is little room for differentiation, but demand remains strong, especially in this disruptive time for COVID-19.
Gross and operating margins at Micron Technology need to be watched closely. Median selling prices for DRAM and NAND have been extremely volatile over the past few years, and drops in median selling prices (ASP) for DRAM and NAND between 30-50% in any given year are not unusual. It will never be easy to operate in a business where ASPs drop so aggressively, requiring continuous innovation.
Other than this, there's not much that can get in the way of Micron's dividend policy - it seems pretty manageable as, in part, the dividend yield isn't aggressive. Competing capital allocation priorities may affect Micron's dividend growth potential as the company intends to continue to buyback substantial amounts of its shares in the future, as has been the case historically, but the Micron's balance sheet is impeccable and the objective is not to compete in dividend, but to return to investors via dividend and via price (share buyback) the trust placed in them.
At the end of the first quarter of fiscal 2022, for example, Micron Technology had a net cash position of $ 2.6 billion (including short-term debt and short-term investments). Given that this does not include the $ 1.8 billion in long-term investments and forward marketable securities that the company had available at the end of this period. Historically, Micron Technology's long-term marketable securities have been represented by cash-like assets (including corporate bonds, asset-backed securities, and government securities) that are not strategic investments, meaning that its net cash position is greater than what it seems at first glance.
Micron Free Cash Flow Analysis
Source: Micron Technology - Fiscal 2021 Annual Report
Stocks that generate a free cash flow margin (free cash flow divided by total income) above 5% are generally considered "dairy cows." Micron Technology's free cash flow margin has averaged about 8% over the past 3 years. Cash flow from operations declined about 6% from levels two years ago, while capital expenditures expanded about 3% over the same period. From fiscal year 2019 through 2021, Micron Technology generated an average of $ 2 billion in annual free cash flow.
The free cash flow measure shown above is generally called 'traditional free cash flow' and is obtained by taking cash flow from operations less capital expenditures (CFO - capex) and differs from business free cash flow (FCFF), which we normally use to estimate the fair value of the company.
In the first quarter of fiscal 2022, Micron Technology generated about $ 700 million in free cash flow while spending $ 100 million to cover its modest dividend obligations and $ 300 million to buy back its shares through its buyback program (another $ 100 million was spent to cover "common stock buybacks"). - Withholdings on the awards of shares to employees in the last fiscal quarter).
Micron's valuation suggests a rise of more than $100
Micron Technology released a favorable short-term fiscal 2022 guidance along with its latest earnings release.
- Revenue of $ 7.5 billion with a margin of error of +/- $ 200 million.
- Gross Margin of 46% +/- 1% error.
- Operating Costs: $ 975 million +/- $ 25 million.
- EPS attributable to shareholder of $ 1.95 +/- $ 0.10 error.
Micron Technology shares rose (previously $ 81.99) after publishing its latest earnings report on December 20 (and are now trading at $ 93.90, + 14.52%). The large share price rise was largely due to the memory solutions provider issuing favorable short-term guidance covering the current fiscal quarter, indicating that its strong performance of late is expected to continue. in the short term. While stocks may appear cheap based on future earnings, we caution members that the industry in which Micron Technology operates is ultra-competitive and exposed to a tremendous price war and cyclical changes.
The risk assessment establishes the margin of safety or the range of fair value that is assigned to each share. The graph below, however, shows the likely reasonable price range for Micron Technology. Being objective, the company is attractive below $ 55 per share (the green line), but quite expensive above $ 103 per share (the red line). Prices that oscillate along the yellow line, which includes the fair value estimate, represent a reasonable price for the company according to the consensus of analysts. Averaging at $ 90, we could still see upside potential in Micron stocks above $ 100, but after those levels, the stock could look a bit pricey.
The upper end of the estimated fair value range for Micron Technology is north of $ 100 per share. Source: Seekingalpha