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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Micron Tech

December 13th 2013
Micron Tech
NYSE Symbol: MU
Industry: DRAM chipmaker
Price as of 12/12: $22.54

The Dow Jones just finished in negative territory for the third straight day. Six down days in the last two weeks with only one good up day. An amazing stat that shows how strong the major averages have been the last several months and for a majority of 2013. The major averages finished in the red last week for the first time since September. We're heading for another down week this week. We may even have a down month. No one ever wants the major averages to go down, but a few down days and down weeks would actually be healthy for the broader market. If this correction continues it will set up perfectly for a year-end rally or a health start to 2014. With the recent pullback, it's a good time to start that list of stocks to buy for 2014. The financials have perked up of late which is a good sign for the markets. The financials would be a good bet to start 2014. Healthcare and biotechs have been white hot and have not abated much. However, at some point the contrarian plays should outperform. Technology has underperformed the S&P 500 once again. A number of techs are performing well including Google and Apple. This week we'll highlight a hot flying chip making company from the 1990s that is once again performing well and earning a lot of money. The stock of the week is Micron Tech. Micron is known for their memory DRAM chips and the pricing for those chips that can go from boom to bust. But a consolidation in the DRAM and NAND industry may lead to longer more sustainable earnings. David Einhorn at Greenlight Capital recently bought $400 million or 2% of the company. He's a believer. Having said that, Micron looks more like a trade for the New Year with great pricing and earnings potential in the first half of the year.

Back at the beginning of November, Micron reported earnings of 20 cents a share vs. the consensus of 30 cents. Revenues rose 44.8% year/year to $2.84 billion ahead of estimates of $2.8 billion. Results for the quarter include $1,484 million, or $1.31 per diluted share, in purchase accounting gains relating to the acquisition and the results of operations of Elpida for the month of August. Revenues from sales of DRAM products in the quarter were 50% higher compared to Q3 due to a 42% increase in sales volume and a 5% increase in average selling prices. Revenues from sales of NAND Flash products were 5% higher in the quarter compared to Q3 primarily due to a 17% increase in sales volume offset by an 11% decrease in average selling prices. Consolidated gross margin improved to 25% in Q4 compared to 24% in Q4. Gross margins for DRAM benefitted from the improved average selling prices. Gross margins for NAND Flash products were unchanged as an 11% improvement in manufacturing costs was offset by the decrease in average selling prices. In a Conference Call, the CEO stated that DRAM business roughly doubled overnight as Elpida and Rexchip delivered scale in the PC segment. He also noted that they were very happy with the performance of its new Japanese team in the graphics arena and expect significant growth from next-gen gaming consoles hitting the market. Management believes that conditions remain favorable for strong memory industry fundamentals. In NAND, MU projects supply this year up in the low 40% range with similar growth next year. For DRAM, MU expects to see declining industry wafers over the next 12 months with the recent fire with their competitor, Hynix.

Micron is not a conservative investment, but business is pretty good right now. Even with the run up this year, the stock still looks compelling. Currently the stock trades for 10 times earnings and 1.6 times sales. The stock has always traded at a discount to the market due to the company's earnings volatility. However a number of analysts are quite bullish on the firm. Stifel raised its target to $26 from $24. From their view, the Elpida transition has been very smooth with no negative surprises for investors. They believe the co and the memory industry are moving toward a more rational business model. Looking out to next year, it appears both DRAM and NAND Flash demand increases may continue to outstrip supply increases. Considering the increasing capital intensity of memory manufacturing capacity combined with increasingly diversified end markets, they believe this trend could extend for many years. Jefferies raised its Micron target to $30 from $25 on the expectation that Elpida's contribution will increase in the near future. Needham's target on Micron is $30 and is on the cusp of multiple expansion. A number of analyst looks earnings closer to $3 to $3.50 then the current $2.28 a share estimates. Micron is not a conservative investment, but does look like a good trade for the New Year.