Micron Technology (MU)

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Micron's sterling year apparent in stock analysis
The Boise company is beating more glamorous Nasdaq names, such as Netflix and Tesla, the car maker.
BY CHARLES STEIN AND IAN KING
BLOOMBERG NEWSDecember 4, 2013 Updated 11 hours ago


SAN FRANCISCO - Micron Technology Inc. has been around for 35 years, competes in the shrinking market for memory chips that go into personal computers, and has lost $1.65 billion since fiscal 2007.

But this year, according to the Bloomberg Riskless Return Ranking, it is as good as it gets.

Micron's success has attracted hedge fund managers, including David Einhorn of Greenlight Capital and Seth Klarman of Baupost Group.

The investors are betting that Micron, whose business has been plagued historically by excess capacity, will benefit from a consolidation in the industry that has set the stage for more stable prices. CEO Mark Durcan predicted in July that memory chips would become a "much, much better industry" after he completed the $2 billion purchase of Japan's Elpida Memory Inc.

"Investors aren't coming in because they see significant growth," said Suji De Silva, a New York-based analyst with Topeka Capital Markets Inc. "What is far more important is the possibility of stable supply and firmer prices."

Einhorn, in a Nov. 21 presentation, said the memory industry was making the transition from a horrible business to just a bad business, according to a person who listened to his talk at the Robin Hood Investors Conference in New York.

Jonathan Gasthalter, a spokesman for Einhorn, declined to comment on the presentation.

Micron, the largest U.S. maker of memory chips, produced a risk-adjusted return of 6.3 percent through Dec. 3 this year, combining the third-highest absolute return in the Nasdaq 100 with higher-than-average volatility. The index is dominated by technology firms.

Tesla, the Palo Alto, Calif.-based electric car company, ranked second, combining for a risk-adjusted gain of 4.6 percent.

Netflix, the world's largest subscription streaming service, gained an adjusted 4.5 percent, third in the ranking. Netflix, based in Los Gatos, Calif., had the second-highest total return in the index and the second- highest volatility.

Bloomberg's risk-adjusted return is calculated by dividing total return by volatility or the degree of daily price-swing variation, giving a measure of income per unit risk. The returns aren't annualized.

After Micron more than tripled in 2013, some investors are betting the best might be over. Short interest in the stock hit 8.2 percent of shares outstanding on Nov. 21, the highest since 2011, and up from a record low of 0.9 percent in January, according to data compiled by Bloomberg and Markit, a London- based provider of financial information services.

Bearish bets against the stock were 6.7 percent as of Nov. 29, which compares with a 2.7 percent average for companies in the Nasdaq 100.

"Some investors are thinking it's been a fabulous party but here comes the hangover," said Betsy Van Hees, a San Francisco- based analyst with Wedbush Securities.

THE BAD TIMES
Investing in Micron hasn't always been rewarding. Like many technology companies, it has yet to approach the highs reached during the peak of the dot-com bubble. After rising as high as $96.56 in 2000, it traded as low as $1.69 in 2008.

The memory industry has a poor record of matching production with short-term swings in demand for personal computers, resulting in supply gluts and plummeting prices. Micron reported a net loss in four of the past seven fiscal years.

Similar losses have thinned out the ranks of companies willing to take the risk of investing billions of dollars in new production facilities. Many have followed the example of Texas Instruments Inc. and Intel Corp., which exited. Others, such as Germany's Qimonda AG and Elpida, failed.

The last Japanese maker of computer-memory chips, Elpida sought bankruptcy protection last year after losses left it unable to pay its debts. Micron acquired the company in July, roughly doubling its share of the global market for DRAM, or dynamic random access memory, the most widely used memory chips in PCs. South Korea's Samsung Electronics is the world's largest DRAM maker.

EINHORN'S EYE
Einhorn, who bet against Lehman Brothers Holdings Inc. before its 2008 collapse, has likened Micron to Seagate Technology PLC, a disk-drive maker whose shares soared in 2012 as that industry consolidated. Einhorn acquired shares of Dublin-based Seagate in the first quarter of 2011 and exited his stake in the second quarter of 2013, regulatory filings show. Seagate more than tripled between March 31, 2011, and June 28, 2013.

Greenlight, Einhorn's hedge-fund firm, bought 23 million shares of Micron valued at $402 million in the third quarter.

Klarman, whose Boston-based firm had assets of about $29 billion as of mid-September, added 22.5 million shares of Micron in the quarter, boosting his holdings to 64 million shares and making Micron his largest U.S. stock position.

Klarman is a bargain hunter who wrote the preface to the sixth edition of "Security Analysis," a 1934 book by Benjamin Graham and David Dodd that is considered the bible of value investing.

Viking Global Investors LP, the hedge fund firm run by O. Andreas Halvorsen, added 29.9 million Micron shares in the quarter, bringing its total stake to 37.3 million shares.

Doug Freedman, a San Francisco-based analyst for RBC Capital Markets, said the uncertainty about the future of personal computers will remain an issue, even as the memory industry reins in supply. "You still have the ability to mess up a market," he said.

PC MARKET
Worldwide PC shipments fell in the third quarter, reaching their lowest level for the period since 2008, market researcher Gartner Inc. said in October.

Brian Krzanich, CEO of Intel, the world's largest maker of semiconductors, said in a November investor meeting that the PC market is beginning to see signs of stabilization.

In October, Micron reported sales for the fiscal fourth quarter ended Aug. 29 that exceeded analysts' estimates, as higher average prices for chips helped make up for lackluster demand for personal computers. Revenue rose 45 percent to $2.84 billion, compared with the $2.7 billion average estimate of 15 analysts in a Bloomberg survey.

Revenue from DRAM products rose 50 percent from the previous period, Micron said, buoyed by a 42 percent gain in sales volume and a 5 percent jump in average selling prices. Micron also makes so-called Nand flash memory, the chips that store information in mobile phones.

Durcan sounded optimistic in July.

"I believe that Micron, to a greater extent than ever before, controls its own destiny," he said. Acknowledging a volatile history, he said, "This business is clearly not for the faint of heart."

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