Micron Technology: Analyst Upgrades – Seeking Alpha

So what are the sell side analysts saying now? Barron's excellent columnist, Tiernan Ray, would do well to get Bernstein's Mark Newman in a room with Credit Suisse's John Pitzer and listen to them chat about Micron Technology (NASDAQ:MU). These are the two sell side analysts I respect the most, and they have widely divergent views on Micron after the company's blowout quarterly earnings, and ultra super duper maximum deluxe robust (technical term) third quarter guidance, delivered on the March 23 earnings call. The tables below demonstrate how divergent Wall Street's view of Micron has become.

Here are the first five firms I've reviewed, on EPS estimates and price targets:

These are all from reports generated after the March 23 earnings call. Blank cells mean no data was presented.

And here's our quintet on revenue estimates, in billions of dollars:

Huh! Well at least they all agree on the third quarter of 2017. Wait! that's smack in the middle of the guided range of $5.2 to $5.6 billion!

Here's some representative language from the reports. First John Pitzer and team at Credit Suisse:

We continue to see fundamentals for MU improving from here - specifically (1) we expect the pricing environment to remain healthy through 2H17 and drive margin improvement for MU; (2) structurally, Memory is a different industry now - higher concentration than ever (HHI 3,300 now versus only 1,900 in 2007), more diversified demand, and slowing supply - we argue margins are more resilient now than in the past, and expect a re-rating as investors realize normalized earnings of >$2 per year; and (3) we continue to argue that strategic value continues to be underappreciated, particularly given China's interest is Memory. Our TP of $40 represents ~8x of our NTM EPS of $5.34 (w/ SBC).

And here is Bernstein's Mark Newman:

The New Memory Paradigm is back, but how much upside is left? We expect this strong pricing to continue in DRAM through the end of CY17 as supply growth in DRAM remains relatively muted this year. We worry more about NAND oversupply later this CY17 due to Samsung's aggressive supply additions and potential oversupply and price weakness later this year.

Taxes. There seems to be some confusion here on SA, and even on the sell side, about Micron's low tax rate and how long it will continue. For a while. Remember Micron's shareholder unfriendly poison pill to protect their Net Operating Loss Carryforwards?

Here are the NOLs from page 85 of the most recent 10k:

And just for fun, here is the same table from the previous year's 10k so you can see that NOLs are growing, not shrinking:

But beyond all these NOLs, Micron operates in a variety of jurisdictions where they don't get levied the full US statutory rate. As a sanity check I looked at Intel (NASDAQ:INTC) over time, and they have a much larger US footprint as a percentage of their total than does Micron:

Source: Bernstein reports 11/4/14, 3/30/15, 3/21/16, and 2/10/17

Those average to 22.8%, far below the maximum US statutory corporate rate.

Finally, and please don't make me dredge up the explanations and examples from business school, GAAP taxes as shown above are not the same as cash taxes. There are plenty of things to worry about with Micron, but current taxes are not one of them.

Free Cash Flow. Also in the confused category is Free Cash Flow. This has been a legitimate worry with Micron over the past year or so. But now, as this table from John Pitzer at Credit Suisse shows, Micron has become something of a Free Cash Flow generation machine:

Note the second to last line of the table: $4.9 Billion in FCF in 2017 and $5.3 Billion in 2018.

Don't believe Credit Suisse (or want it in a type size you can see)? How about the gang at Citicorp:

Also note what this does for cash balances in Citi's estimation, with a static LTDebt amount of $11.3 billion over the same period:

So at least these two analysts don't feel cash flow is an issue.

I am interested and a bit nervous as to what Micron may do with regard to bidding on Toshiba's (OTCPK:TOSBF) memory assets, and bids are due this week. Bloomberg feels bids may be in the neighborhood of $13 billion. My hope is that Micron joins a consortium bid which I imagine might include Silverlake, their portfolio companies Dell & EMC, Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT). While I hope Micron won't do a solo bid, they will surely have to ante up in any consortium. And while I don't want dilution, this could be a worthy and ultimately anti-dilutive extremely accretive rollup of more of the memory industry. In a correctly structured and priced consortium bid, I would support Micron making an equity offering of 10% of its shares.

Conclusions. Reviewing what the sell side is saying, or more particularly reviewing how what they are saying has changed, is a key step in beginning to formulate my own earnings estimate. Clearly Mark Newman of Bernstein feels we are late in the cycle and the downturn is around the corner. John Pitzer of Credit Suisse seems to think this cycle has a ways to go. I suspect my own estimate, which I've begun working on, will come out somewhere between the two but trending towards the high side based on the many pages of updates I've read.

I'm a bit surprised that Micron's stock price didn't react more favorably to this incredible earnings call. On the other hand, the aftermarket on Thursday saw 12 million shares traded, the pre-market on Friday saw another 6 million, and Friday's regular session saw 107 million. We are getting some new shareholders for this trip into the wild blue yonder. Buckle up for the trip! Good luck to all.

Disclosure: I am/we are long MU, INTC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Micron Technology: Analyst Upgrades - Seeking Alpha