Archive for the ‘Semiconductors’ Category

Investment Idea #2: Micron Technology, Inc. (Buy, Target $13.50)

Friday, February 26th, 2010

MICRON TECHNOLOGIES, $9.07 CLOSE

INVESTMENT THESIS

Micron will continue to outperform as global business investment increases in the 1st & 2nd quarters.  There is a lack of capacity in the market, and as a result margins will continue to be resilient in the medium term.  Production and capital expenditures will continue to rise as companies foresee a rise in stimulus driven consumption.  The Chicago Fed recently released leading indicators for the month of January, and manufacturing is certainly leading.  Despite the recession, computer shipments have been rising globally.  DRAM has been in under-supply.

Together, Micron and Samsung have almost 50% of the memory market for NAND, DRAM, and NOR.  This gives them pricing power, which will benefit them as players in the semiconductor industry.  Samsung has about 30% of the market, which post-acquisition Micron has about 20%.

ACQUISITION

The acquisition of Numonyx will almost immediately add income to Micron’s bottom line due to cross selling opportunities with Numonyx’s clients and the fact that Numonyx’s equipment is fully depreciated, so moving operations to its facilities will be more profitable.  Although Numonyx’s revenue growth is not as high as Micron’s, it will contribute more to earnings than most think.  There may be risks in the future however of having to replace this equipment, but it is certainly not a short to medium term risk.

Numonyx, formerly a private company, will contribute 30% to Micron’s sales.  Numonyx focuses on the NOR Flash memory area, which is not growing rapidly, but will provide cash flow.  Gross margins are fairly similar across both companies.

Micron purchased Numonyx for 1.27 billion in stock at sales multiple of about 0.6x, which is relatively cheap.  The company also had no debt load.

REVENUE GROWTH

Micron’s management expects between 30 and 50% revenue growth over the previous year.

COST STRUCTURE

Micron’s cost structure is much leaner than its competitors and R&D as a % of Sales has fallen from 14% to 7% from 2007 to 2010. Sales, General & Administrative Expenses have fallen from 7% to 5% over the same period, and EBIT is expected to be 10% this year, as compared to -35% last year due to pricing pressures.

CASH FLOW

Cash flow from operations is expected to increase 25%+ from 2010, however total leverage is expected to stay the same.  The company will have to reinvest its extra cash into operations and is scalable enough to start new businesses in the memory space.

CAPITAL STRUCTURE

Total debt to capitalization is projected to fall from 36% in 2009 to 25% in 2010.

INVESTMENT RISKS

Micron is active in the intensely competitive DRAM and NAND Flash memory markets which could be adversely affected if demand suddenly drops.  Pricing and volume characteristics of the industry are highly dependent on business investment.

COMPANY DESCRIPTION

Micron Technology, Inc. is a global manufacturer and marketer of semiconductor devices, principally dynamic random access memory (DRAM) and Nandi Flash memory (NAND). In addition, the Company manufactures complementary metal-oxide semiconductor (CMOS) image sensor products under a wafer foundry arrangement. The Company operates in two segments, Memory and Imaging. The Memory segment’s primary products are DRAM and NAND Flash, which are memory components used in an array of electronic applications, including personal computers, workstations, network servers, mobile phones, Flash memory cards, universal serial bus (USB) storage devices, moving picture experts group layer-3 audio (MP3/4) players and other consumer electronics products. On July 10, 2009, the Company sold a 65% interest in Aptina Imaging Corporation (Aptina) to Riverwood Capital and TPG Capital.

COMPETITORS

SanDisk Corporation (NASDAQ:SNDK) is engaged in designing, developing and manufacturing products and solutions in a range of form factors using the flash memory, controller and firmware technologies.

Intel Corporation (NASDAQ:INTC) is a semiconductor chip maker, developing advanced integrated digital technology products, primarily integrated circuits, for industries, such as computing and communications.

Advanced Micro Devices, Inc. is a global semiconductor company that designs and sells microprocessors, chipsets and graphics processors.

NVIDIA Corporation (NASDAQ:NVDA) is a provider of visual computing technologies and the inventor of the graphic processing unit (GPU), a processor, which generates graphics on workstations, personal computers, game consoles and mobile devices.

Broadcom Corporation (NASDAQ:BRCM) is a provider of semiconductors for wired and wireless communications. Broadcom provides a portfolio of system-on-a-chip (SoC) solutions to manufacturers of computing and networking equipment and, broadband access products and mobile devices

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PRICE TARGET

The LA team feels that a $13.50 target is appropriate for Micron, which provides 48% upside to yesterday’s close.  The valuation is at about 1.5x projected FY2010 sales, which is 25% below the company’s eight year average sales multiple.  The valuation is also at about 12x projected earnings.