Micron (MU): A Fascinating Story of Growth, Execution, and Attractive Valuation

On back of Micron's 2018 Analyst Conference, Nomura's Romit Shah has come away with strong confidence in the chip giant's potential in the industry.

Micron (NASDAQ:MU) shares were sent vaulting almost 6% yesterday. First, investors relish a fresh agreement inked with Intel, shipping next-gen flash drive and digital camera chips. Second, MU unveiled plans to buy back $10 billion of its shares. This already follows Monday’s fiscal third quarter guidance hike, with new projections toppling the tail-end of Micron’s prior outlook. Additionally, the MU team hosted its 2018 Analyst Conference on Monday in New York that has Nomura analyst Romit Shah singing its praises as “one of the best analyst meetings that we’ve ever attended.”

Shah has emerged from the meeting with conviction in the semiconductor leader as “a better run company operating in a better industry,” enticed by a robust growth narrative, stellar tech execution, and the new multi-billion-dollar buyback plan that sets Micron up for shareholder returns in the short-term as well as down the line.

Assessing shares to be “highly undervalued,” the analyst reiterates a Buy rating on MU with a $100 price target, which implies a close to 73% upside from current levels. (To watch Shah’s track record, click here)

Should Micron dip approximately 30% in revenues to $20 billion, this is a giant that is still primed to bring to the table $7 to $9 in EPS power against fiscal 2017’s comparable revenues that realized around $5 in EPS.

Moreover, Shah gives kudos to new leadership that has executed brilliantly on technology inflections, allowing the company to hit “record time to mature yields on its 1x nm node in DRAM, outpacing its previous 20 nm node by 25%. Further, qualification times have improved gen-over-gen, with the 1x nm DRAM and 64-layer 3D NAND nodes seeing over 20% and 30% improvement vs. previous nodes, respectively […] We believe Micron is successfully transitioning to higher value solutions in NAND, which should provide a tailwind to margins.”

The analyst anticipated NAND gross margins will jump from 36% in the third fiscal quarter of 2017 to 48% in the third fiscal quarter of this year, calling for DRAM gross margins to rise from 54% in the third fiscal quarter of last year to 68% in the same quarter for 2018. Moreover, market dynamics are continuing to track “positive.” In fact, Shah credits stronger-than-anticipated pricing dynamics in DRAM as well as NAND and margin expansion in NAND to lead the MU team to meaningfully lift its third fiscal quarter guide.

For context, whereas MU had once expected to yield $7.2 to $7.6 billion in revenue for the third fiscal quarter, the company now anticipates $7.7 to $7.8 billion. Likewise, the company has tweaked its EPS guide upwards from $2.76 to $2.90 up to a range of $3.12 to $3.16. On back of the confident revision, the analyst follows suit, raising his fiscal 2018 revenue forecast from $29.9 billion to $30.2 billion and EPS from $11.18 up to $11.80. As the share count decreases from 1.25 billion shares in fiscal 2018 to 1.23 billion in fiscal 2019 and 1.16 billion in fiscal 2020 from a predicted $2 billion in repurchases per quarter in fiscal 2019, the analyst accordingly makes tweaks to his model. For fiscal 2019, the analyst adjusts his revenue projection from $36.7 billion to $37.2 billion and EPS from $12.88 to $14.70; and fiscal 2020 revenue estimate from $37.8 billion to $38.8 billion and EPS from $13.32 to $15.89.

Another key takeaway for the analyst from the conference: New CFO David Zinsner reflects interest marking shareholder return to be a greater priority for the company; especially with the monster $10 billion buyback authorization buzz and a commitment to return a minimum of 50% of free cash flow to shareholders starting the next fiscal year. This is a tech player Shah sizes up as more than “capable” to repurchase a minimum of $8 billion of stock come fiscal 2019. The MU team likewise suggested the prospect of kickstarting a first-time dividend, which could spring to reality in the upcoming 12 months, predicts the analyst.

Bottom line, “The company laid out an interesting story that tied strong secular growth (increasing relevance of memory and storage to AI, IoT, cloud computing, etc.), solid technology execution, and an attractive financial model ($10 billion buyback) that we believe will drive shareholder return both in the near- and long-term,” Shah surmises.

TipRanks suggests a strong bullish consensus betting on this chip giant’s prospects at hand. Out of 24 analysts polled in the last 3 months, 20 rate a Buy on MU stock, 3 maintain a Hold, while 1 issues a Sell. The 12-month average price target stands tall at $76.65, marking nearly 30% in upside from where the stock is currently trading.

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