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Leigh Baldwin & Co.

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Stock of the Week

Micron Tech

July 5th 2018

 

Commentary and opinions presented to this site are for informational purposes only and should not be considered as a solicitation to buy or sell any security.  Please contact your financial professional for specific guidance on investments.  The author of this article does own or has a vested interest in this security but is required to hold the position for at least 10 days and cannot write about a stock in the period of 2 market days before to 2 market days after purchasing or selling the stock.

Micron
NYSE Symbol: MU
Industry: Semiconductor chips
Price as of 7/2: 54.48

 

The major averages finished the week on a whimper but closed higher for the month of June which is seasonally one of the worst months of the year. After a great January most of the major averages have come back to earth and remained dormant. The Dow Jones is actually negative for the year. The S&P 500 is modestly higher for the year, up 2.6%. The International markets have done no better, now negative for the year. The real winners so far have been the Nasdaq up 9% and the Russell 2000 up 7.6%. Only three sectors are beating the S&P 500. Those three are tech, retail and energy. Tech was the big winner last year and remains one of the top sectors in 2018 up 10%. Personally, I think tech is ready for a rest and may underperform going forward. Retail is rebounding as the fears of Amazon are subsiding. Energy closed out the second quarter with the best performance of all 11 sectors. Energy remains my top sector since highlighting it back at the end of February and is typically the best sector to own in the late stages of an economic cycle.  The Energy sector is up 10% since we featured it with three of our picks up 13% or more. The big winner so far is the Chilean oil company, Geopark (GPRK).

Even though I believe tech is due for a rest, the tech stocks will continue to churn out record profits and record cash flow. When the next NFL TV contract comes up, don't be surprised to see Google, Amazon, Netflix or Facebook win the contract. With the tech profits and cash flow, it will be hard for the traditional cable companies like NBC, CBS, FOX and ABC to compete.

This week I'll recommend a stock generating record earnings, record sales and record cash flow, but only trading for 4.4 times earnings. The stock of the week is memory chip maker, Micron (MU). Micron has never traded for a high PE multiple due to the cyclicality of their earnings. The bullish thesis for Micron is that their business is no longer as cyclical as it once was. In the past Micron relied on PC and server sales for a majority of their business. But as we know more and more products demand chips. New innovations, a new wireless infrastructure called, 5G and artificial intelligence are growing the area of IoT (Internet of Things). External research firms expect the number of IoT devices to grow about 150% from 18.0 billion devices in 2017 to 27.0 billion devices by 2021. That's good news for Micron and demand for their chips.

Cloud computing continues to grow for Micron. While other investors chase cloud software makers like Salesforce.com, Oracle, and others, they should really be looking at Micron with their chips going into all the server farmers that house the cloud space info. Second, cellphones require more and more chips. The high-end phones like the iphone X require Micron chips for feature-rich with capabilities like augmented reality, artificial intelligence, and facial recognition. But the CEO of Micron recently mentioned mid-level and low-end smartphones will provide these features in the coming years and will require more Micron chips. The Chinese consumers are very sensitive to specification and features and are driving smartphone innovation. China already accounts for 20% of Micron's business. The recent trade talks have raised concerns for Micron, but longer term the demand will keep growing.

The third new demand for Micron chips will come from the move to 5G. This will be the fourth time in history that the world's telecommunications providers (the telcos) have acknowledged the need for a complete overhaul of their wireless infrastructure. 5G would increase download speeds by 100x compared to 4G/LTE (long-term evolution). High network speeds would improve the ability to transfer data and give developers more room to innovate new features. This should create another smartphone upgrade cycle next year that will require Micron's small, but power-efficient chips with the industry's lowest power mobile DRAM.

The next big growth area for Micron is the expansion of AI capability and products which will require more DRAM and NAND Flash in devices. For example, a normal surveillance camera requires 0.4 GB (gigabyte) of DRAM and 64 GB of NAND. However, a smart surveillance camera will require 16 times more memory—8 GB of DRAM and 1 TB (terabyte) of NAND to store data and process.

Lastly, Micron will benefit from the push for semi-autonomous vehicles. Micron's chief business officer, Sumit Sadana, stated that the semi-autonomous L1 and L2 cars that are currently on the road require 8 GB (gigabyte) of DRAM (dynamic random-access memory) and NAND (negative AND). But the new semi-autonomous cars or L3 that will hit the road in 2021, will require double the DRAM content per car and the NAND content per car would grow 31x to 256 GB. As the capabilities of autonomous car improve and the world moves toward L5 cars by 2025, the DRAM and NAND content per car could rise fourfold to 74 GB and 1 TB (terabyte), respectively.

Add it all up and its easy to see why management at Micron is bullish. Recently Micron issued a $10 billion share buyback and will targeting at least 50% annual free cash flow going forward (approx $8 billion a year) to stock repurchases. The decision to do buybacks rather than dividends has led to the belief that shares are underpriced in management's opinion. At the current price Micron could buy back 15% of outstanding shares which would raise earnings estimates to $13 to $14 a share for PE of just 3.8.

Looks like a cheap stock.