Technology (Beta) Micron Technology, Inc
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Krause Fund Research Fall 2018 Technology (Beta) Micron Technology, Inc. (Nasdaq: MU) November 12, 2018 Recommendation: BUY Analysts Current Price $37.44 Ivan Morales Target Price $54-63 [email protected] Kameron Kopaska [email protected] MU Investment Highlights Yu Shen Lim [email protected] Micron benefited from some of the top earnings in the semiconductor industry with an increase in revenues of 69.87%. Company Overview While decreasing their gross margin from 41.51% to 58.87%. Micron Technology, Inc (MU) is a leader in the Micron is the leader in the US of the production Dynamic semiconductor industry. They participate in the selling for Random Access Memory chips just behind Samsung and SK Dynamic Random Access Memory (DRAM) memory chips Hynix. DRAM chips saw an increase in sales volume and prices and NAND chips. These products are offered in many saw an increase of 37% in 2018. different products and applications such as cloud computing, smartphones, tablets, and automobiles. Micron Due to Micron’s strong earnings and capital structure, is divided into four different business segments Compute Micron will be buying back stock starting in 2019. Micron will and Networking Business Unit (CNBU), Storage Business back 10 Billion dollars’ worth of stock using half of their free Unit (SBU), Mobile Business (MBU), and Embedded cash flows. Business Unit (EBU). Micron’s Fiscal year 2018 finished August 31 where they reported revenue of 30.604 Billion up Micron is investing in its intellectual property by buying out from 20.322 Billion. Net Income increased from 5.089 Intel in their joint venture IMFT for 1.5 Billion dollars to work Billion to 14.135 Billion. Micron raised their EPS share on the development of 3D XPoint technology. from $4.67 a share to $12.27 a share. With the growing demand in cloud computing and artificial Stock Performance Highlights intelligence, the reliance on semiconductors will continue to 52 week High $64.66 increase. 52 week Low $33.82 Beta Value 1.85 With China being the largest market for Semiconductors Average Daily Volume 36.807 m and not having any companies headquartered there allows for more growth in the industry. Share Highlights Market Capitalization $43.703 b One Year Stock Performance Shares Outstanding 1.21 b Book Value per share $5.08 EPS (2018) $0.87 P/E Ratio 3.35 Dividend Yield 0% Dividend Payout Ratio 0% Company Performance Highlights ROA 42.63% ROE 42.63% Sales $30.604 b Financial Ratios Current Ratio 2.787 Source: Yahoo Finance17 Debt to Equity 13.98% 1 Economic Analysis Real GDP Real GDP is an economic measure which tracks the value of all goods and services produced in a given year. Q3 revealed real GDP of 3.5%, down 70 basis points from Q2’s four year high. The decrease seen from Q2 to Q3 was expected, however, Q3 GDP still beat market expectations of 3.3%. This surprise shows that the economy is still strong and should remain that way for Source: Statista9 2019 due to low unemployment and high consumer confidence. Although the U.S. has seen strong quarters as of late, we expect Silicon Production real GDP to normalize to an annualized rate of 2-3% in 2019 due to trade tensions with China. Silicon is a major input used in the production of semiconductors. China dominates the production of silicon followed by Russia and the U.S. Source: Bureau of Economic Analysis8 Source: Statista9 Interest Rates We do not expect trade tensions to spill over to the Silicon When the FED increases the federal funds rate, it has an effect market. In March of 2018, the US International Trade on interest rates charged by banks. This helps reduce spending Commission blocked the President’s request to impose tariffs on to decelerate an overheating economy and keep inflation low. imports of silicon metal because the commission did not believe We expect to see another rate hike in December of 2018, and at silicon imports hurt U.S industries. least one more rate hike in 2019. This will hurt companies by Silicon Prices increasing their cost of debt, but will give the FED options should the economy spiral into a recession. Due to the correlation between interest rates and the strength of an Steady prices in Silicon translate to steady costs for economy, we believe rate hikes will not hurt Micron’s sales. semiconductor companies. We found the price of Silicon material has fluctuated over the years, but overall, has shown a decreasing trend. Inflation Inflation measures the increase in prices and the decrease of purchasing power. In the U.S., there are two primary price indices: the consumer price index (CPI) and the producer price index (PPI). CPI measures inflation from the viewpoint of the buyer, while PPI measures inflation from the viewpoint of the seller. Jerome Powell believes contractionary monetary policy will keep the job market strong and keep inflation near 2% for the next several years. We believe inflation will remain near 2% in 2019. 2 Forecasted Prices of Aluminum for semi-conductors tend to increase. However, when demand weakens, it causes the market to be flooded with an increased supply thus hurting sales for the industry. It is because of this trend that semi-conductor companies are known to be very cyclical. Although the industry is cyclical, it has outperformed the S&P 500 by a margin of 4.75% over the past three years, a margin of 8.51% over the past five years, and a margin of 4.47% over the past ten years10. YTD performance of the industry is trailing the benchmark by a margin of 6.56 percent, primarily due to 2018Q1 revenue declining 3.4% YoY and trade tension between China and the United States11. Source: Bloomberg The graph above shows the median consensus forecasts for aluminum. The price for aluminum is expected to remain stagnant until 2020, when the price is expected to increase by nearly five percent. Aluminum is widely used as a thin film to adhere to silicon to increase conductivity in semiconductors; an increase in the price of aluminum represents an operational risk. We incorporated this assumption into our model by increasing cost of goods sold by five percent in 2020. Forecasted Prices of Copper Source: SPIndices12 Copper is the second best conductor of electricity and is a Recent Developments common input for semiconductor companies. The price of copper is expected to increase by a CAGR of 2.7 percent. We The table below shows lead times for capacitors, resistors, and incorporated this assumption into our model by increasing cost discretes. Capacitors are used for the storage of electrical of goods sold by 2.7 percent until our CV year. charges, resistors are used in semiconductors to control the flow of current, and semiconductors that are not considered to be an integrated circuit is considered a discrete device. Supply has shifted from short lead times of 14 weeks or less to “highly constrained” lead times, resulting in squeezed supply and higher prices. Delayed delivery of products could result in loss of revenue and competitive positioning. Source: Bloomberg Industry Analysis Semiconductor Industry Semi-conductors produce current and are crucial to the technology sector. Semi-conductors are used as inputs in products such as, computers, cell-phones, televisions, and many others. Popular products sold in this industry include memory chips, microprocessors, commodity integrated circuits, and complex System on a Chip (SOC). 13 The semi-conductor industry is one that closely follows the Source: EPSNews macro-economy. During times of economic prosperity, demand 3 Micron’s Industry Position Micron accounts for approximately 5% of all revenue generated by the industry, trailing only Intel (10.2%) and Taiwan Semiconductor Manufacturing Company (5.22%). The figure below displays major players in the industry in terms of revenue. Source: Statista Trends Companies in this industry tend to outperform the benchmark if their R&D is high relative to sales. We tracked this metric among the top six revenue producers in the industry as classified by Bloomberg Intelligence. The average among these six companies was 14.63 percent. Source: Bloomberg Terminal Micron generates a majority (57%) of their revenue in China, causing its main competition to be overseas with Samsung and Taiwan Semiconductor Manufacturing Company. Segment Breakdown Micron’s products consists of DRAM and NAND chips. In 2012, Micron held only 1.3% of DRAM sales. As of 2018Q2, they are responsible for over 17% of DRAM sales. This highlights Micron’s ability to remain competitive in the industry by transitioning research & development into sales. Source: Bloomberg Terminal Higher profit margins allow companies to absorb fluctuations in input prices and stymie losses inherited from the delayed delivery of products. It also measures manufacturing efficiency, a crucial metric considering manufacturing yields across the industry have increased from 10% in 1980 to 80% in 2018. Source: Statista Samsung is also the dominant player in the NAND market, accounting for roughly 36% of all revenues generated for this product. Micron’s market share for this product has remained stagnant since 2013Q4. The graph below displays major players in the NAND space. Source: Bloomberg 4 Micron’s gross margin increased from 8.436 Billion to 17.891 Global internet usage has risen by just over 20% from 2014 to Billion. Micron saw Net Income grow from 5,089 to 14,138 2018 and is expected to rise just under 10% from 2018 to 2021. million from 2017 to 2018. Earnings per share increased from This bodes well for the industry as the Internet of Things (IoT) $4.67 to $12.27 per share.