Is the Market Underestimating Micron Technology (MU) EPS Power Over the Next Years?

Nomura's Romit Shah dishes his positive insights on MU following an encouraging meeting with new CFO David Zinsner.

After spending two days chatting with investors along with new Micron Technology (NASDAQ:MU) Chief Financial Officer David Zinsner and Head of Investor Relations Shanye Hudson, Nomura analyst Romit Shah has emerged with some key, bullish takeaways.

First, Shah shares he has no expectations for a big jump in capital expenses for the upcoming fiscal year. Micron’s new CFO highlighted a desire to pay attention to ROI as well as advancing technology node transitions, leaving Shah continuing to angle for $9.2 billion in capex for fiscal 2019- a 17% year-over-year rise from the analyst’s capex forecast for fiscal 2018 of $7.9 billion.

Meanwhile, the MU management team seems unfazed that NAND average selling prices (ASPs) in the second fiscal quarter took a dip, believing this trend should not continue. In fact, Shah wagers, “Our forecast for continued margin declines through the August period may prove too conservative,” adding that seasonality in consumer is a factor that likely will not linger in the next periods.

“Management continues to expect DRAM suppliers to be rational about capacity expansion in an effort to sustain high margins and cash flow. Our global memory team (led by CW Chung in Korea) anticipates an incremental 150k wafers/month of capacity through the end of CY19. Importantly, we estimate that an additional ~80k wafers/month in CY18 and ~70k wafers/month in CY19 is required to sustain 20% industry supply bit growth,” continues Shah.

The bigger picture bodes well for MU’s powerhouse earnings potential throughout fiscal 2018- potential Shah believes the Street is underestimating: “Overall, meetings with management reaffirmed our belief that earnings power ($12-14) over the next year is far greater than what the market is currently discounting. Tactically, we expect continued volatility in the share price in April with earnings from Lam Research and Samsung providing opportunities to further accumulate shares.”

Looking ahead, MU intends to hold an analyst meeting in May, where the company’s new CFO will shed light on capital return. Shah calls for free cash flow to be deployed to pay down equity-linked debt and repurchase shares come fiscal 2019, adding that he does not deem dividend a “priority” for the company’s short-term.

As such, the analyst reiterates a Buy rating on MU stock with a $100 price target, which implies a just under 103% upside from current levels. (To watch Shah’s track record, click here)

TipRanks pinpoints Micron as a tech darling among investors, generating a strong bullish favorability ranking according to analytics. Out of 21 analysts polled in the last 3 months, 17 are bullish on MU stock, 3 remain sidelined, and only 1 is bearish on the stock. With a solid return potential of 46%, the stock’s consensus target price stands at $72.35.

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