Thursday, July 23, 2015 8:29:01 AM
Jul. 23, 2015 4:15 AM ET | 10 comments | About: Micron Technology Inc. (MU)
Disclosure: I am/we are long MU, BBRY. (More...)
Summary
Micron's stock has been "in play" in July due to a rumored takeover attempt by China's Tsinghua Unigroup.
A deal is highly unlikely -- for both regulatory reasons and valuation concerns.
I remain long because Micron is a deep value play, not because of buyout rumors.
After sliding another 5% yesterday, Micron trades at a compelling 2015 core FCF multiple.
By now, shareholders of Micron Technology, Inc. (NASDAQ:MU) are used to nerve-wrecking volatility. Micron shares got the boot by disgruntled shareholders after the chip maker reported third quarter fiscal 2015 results at the end of June that missed the Street's consensus earnings and revenue estimates. Not only did Micron miss estimates, but the company also guided for lower revenues, which investors got particularly edgy about. As a result, Micron lost 18% of its value in a single day.
Micron's stock is now down 49% year-to-date, after sliding another 5% yesterday. Ouch.
(click to enlarge) (click link for chart)
Source: StockCharts.com
The painful sell-off in June after Micron released earnings appeared to be a good investment opportunity, because the chip maker's stock was not only hopelessly oversold, but also really cheap. As a matter of fact, I penned a dedicated article at the time, adequately entitled "Micron Technology: Buy When Blood Is In The Streets?".
Fast forward a month, and Micron's shareholders are on edge once again. The Chinese Tsinghua Unigroup, a state-owned enterprise, was said to launch a bid for Micron worth $23 billion in mid July. The transaction price would work out to about $21 per share.
As is often the case when transaction rumors circulate, shares of the target company pop, and Micron was no different: Micron's shares jumped 11% on July 14, 2015. Micron even reclaimed the $20 mark in the days after, but excitement over the deal quickly faded as investors weighted the odds of a successful deal completion.
Transaction highly unlikely to happen, so don't get your hopes up
A merger deal in the security-sensitive chip industry is highly unlikely, especially when the proposed transaction involves a Chinese (state-owned) company. Investors should have actually learned that much from the persistent takeover rumors haunting BlackBerry (NASDAQ:BBRY) shareholders at the end of last year.
At the time, Chinese tech company Lenovo was said to be launching a bid for the struggling smartphone company. While no formal proposal was made by Lenovo, it was clear fairly quickly that an acquisition would face strong regulatory pushback. BlackBerry's mobile security infrastructure is a national security concern since government communications in the U.S. and in Canada rely on it. While I am not implying that Lenovo or, in the most recent case, Tsinghua Unigroup have other than economic interests in scooping up a Western tech company at bargain basement prices, it is highly unlikely that the U.S. government would be willing to approve such a deal.
Secondly, executives at Micron are no dummies. Even if regulatory hurdles were no reason for concern, Micron would probably not agree to a takeover price below $40. Remember, at the end of last year, that's only seven months back in time, Micron's stock traded in the mid-$30s. And that price didn't even include a deal premium.
Micron is a steal
The main reason why I remain long Micron Technology, independent of whether a buyout takes place or not, relates to the chip maker's low valuation on a core FCF basis.
In the first nine months of the current fiscal year, Micron pulled in $3.57 per share in operating cash flow. Deducting only core capital expenditures of $1.93 per share (no consideration of purchases and sales of available-for-sale securities) leads to a 9M15 core FCF of $1.64 per share. This translates into $2.19 per share in estimated full-year 2015 core FCF. Implied core FCF multiple based on a share price of $18.00: 8.2x. Micron is a steal.
Your Takeaway
As a Micron shareholder I am not going to hold my breath about a takeover. Too often have buyout rumors popped up in the stock market and they have equally quickly vaporized into thin air. The reason to own Micron is its low valuation on a core FCF basis. Long.
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http://seekingalpha.com/article/3348695-micron-technology-is-a-steal-at-18
MU
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