Wednesday, May 20, 2015 9:11:26 AM
May 19, 2015 7:08 AM ET | 2 comments | About: Micron Technology Inc. (MU), AMAT
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in AMAT, MU over the next 72 hours. (More...)
Summary
Micron fell steadily in 2015 for three reasons.
Applied Materials dropped after its merger plans with Tokyo Electron fell apart.
3D NAND is an opportunity for both firms in the second half of the year.
Target price introduced: $30 for Micron and $22 for Applied Materials.
After watching Micron Technology (NASDAQ:MU) fall steadily and then Applied Materials (NASDAQ:AMAT) and Tokyo Electron cancelling their merger plan, there are now two good opportunities for investors to buy shares of undervalued semiconductor firms.
The positive momentum in shares of Micron Technology evaporated in 2015, after peaking at $36.59 in December 2014 and closing at $26.3 on May 15, 2015. Investors are trying to figure out when the shares will recover. Tracking the management commentary from the quarterly conference call with Applied Materials gives hints as to what is in store for Micron. Chances are good that both firms will see a recovery in their share price by the second half of this year.
MU Chart
MU data by YCharts (click link below for charts/tables)
Why Micron Technologies Fell
There are three reasons why the stock is dropping steadily. First, Micron's second-quarter fiscal results showed that revenue for DRAM was weak (down 13 percent). Second, market participants constantly worry over Samsung Electronics (OTC:SSNLF) adding capacity two years from now. Third, there are risks in ramping up 3D NAND production later this year.
It is useful to reaffirm that the drop in DRAM revenue is not due to problems with Micron. Even though DRAM memory demand is dropping, Micron is not losing market share to Samsung. In the fourth quarter, the market share for SK Hynix (OTC:HXSCF) grew to 27.7 percent, Micron's market share edged higher to 24 percent, while Samsung's market share actually fell to 41.4 percent.
In the first quarter, revenue for DRAM fell globally by 7.5 percent. SK Hynix is sustaining profitability through the 25 nanometer process. Applied Materials' forecast suggests steady profitability for DRAM through 2015. DRAM orders were at the highest levels since 2010 for Applied Materials. The firm anticipates bit growth in the range of 25 to 30 percent, thanks to customer spending increasing as much as 25 percent year-over-year. Even though DRAM supply was high last quarter, Applied Materials expects three things driving DRAM: wafer starts, capital intensity, and market position.
Opportunity: 3D NAND
Markets expect that 3D NAND will boost profitability and revenues for Micron. In fact, Applied Materials also benefits as the semiconductor industry transitions to it later this year. Applied Materials is investing 40 percent of its NAND in 3D NAND. The firm thinks NAND bit growth will reach the 35-40 percent range. Customers are gaining confidence in the ramp to 3D as yields improve and volume increases. Applied Materials also benefits from the industry shift to 3D NAND. Manufacturing will transition from planar to 3D NAND, which means applying etch and deposition products in the process.
Micron expects the full production of MLC and TLC versions of 3D NAND by calendar Q4. In 2016, it will be a meaningful supply, but by 2017, it will be the majority of its bits.
Share buybacks
There are three more reasons Applied Materials represents a good investment. The firm forecast non-GAAP EPS of $1.70 per share. It authorized a $3 billion repurchase over three years. At the end of Q2, Applied Materials had $4.2 billion in cash and investments. Similarly, Micron authorized a $1 billion share buyback program. In Q2, the company bought back $192 million, or 6.5 million shares.
Valuation assumptions and target price
At current levels, Micron is valued at 5.2 times EV / LTM EBITDA. This is too low, because the market is not assuming any second-half recovery. At 5.5 times, Micron is worth at least $31.50. Assigning a 10 times multiple to fiscal 2015 earnings of $3.14 per share, the company would be worth $30:
(click to enlarge) (click link below for charts/tables)
(Source: LeveredReturns)
Applied Materials anticipates earning $1.75 per share in the fiscal year. Given the company's strong positioning in multiple sectors (solar and semiconductor), an 11 times multiple is reasonable. This suggests the stock is undervalued by at least 8.5 percent:
(click to enlarge) (click link below for charts/tables)
(Source: Levered Returns Model)
Bottom line
The pullback in shares of Micron and Applied Materials is temporary. The demand for DRAM and NAND will improve in the quarters ahead. Server DRAM demand is healthy, while desktop PC demand will improve in the second half of the year. This is driven by Microsoft's (NASDAQ:MSFT) release of Windows 10. New smartphone models will also mean ongoing strong demand for 3 and 4 gigabyte DRAM. Later this year, when firms start 3D NAND production, the operating margins will improve. All of this means that these two firms should trade at higher stock prices.
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http://seekingalpha.com/article/3194786-buy-micron-and-applied-materials?auth_param=udil:1aloqrr:98aee13c6e482ef8f2a6cafc6b280f36&uprof=46
mU
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