By The Swiss Trader
Micron Technology, Inc. (NASDAQ:MU) is focused on designing and manufacturing some of the world’s most advanced memory and semiconductor applications. Chances are you use the company’s memory products on a daily basis in everything from computing, networking, and server applications, to mobile, embedded, consumer, automotive, and industrial designs. The number of patents that the company owns is a testament to its ability to use design capabilities in its core strengths in memory to build and develop its business.
Micron recently reported its results for the fourth quarter ending August 30th, 2012 and the fiscal year ending on the same date. For the fourth quarter, the company reported a net loss attributable to shareholders of $243 million, or $0.24 per diluted share, on net sales of $2 billion. This compared to a net loss of $320 million, or $0.32 per diluted share, on net sales of $2.2 billion for the preceding quarter of fiscal year 2012, and a net loss of $135 million, or $0.14 per diluted share, on net sales of $2.1 billion for the same quarter of 2011. For the fiscal year, the company had a net loss attributable to shareholders of $1.03 billion, or $1.04 per diluted share, on net sales of $8.2 billion. Cash flows generated from operations were $2.1 billion for fiscal year 2012. This compares to net income of $167 million, or $0.17 per diluted share, on net sales of $8.8 billion for the previous fiscal year.
Revenue from sales of NAND Flash products were 12% lower in the fourth quarter of fiscal year 2012, compared to the preceding quarter, primarily due to an 11% decrease in sales volume. The decrease in sales volume was due to a one-off increase in volume in the third quarter from the sale of work-in-process inventories because of the restructuring of the IM Flash joint venture with Intel (INTC). Revenue from sales of DRAM products in the fourth quarter of fiscal 2012 were down 9% compared to the third quarter due to a 9% decrease in sales volume. Sales of NOR Flash products were approximately 12% of total net sales for the fourth quarter of fiscal year 2012. The gross margin of 11% in the fourth quarter of fiscal 2012 remained unchanged from the third quarter. Improvements in the company’s profit margin from sales of NAND Flash and NOR Flash products were offset by declines in the company’s profit margins from sales of DRAM products.
Cash flows generated from operations for the quarter of fiscal year 2012 amounted to $450 million. The company invested $372 million in capital expenditures, ending the quarter with cash and equivalents of $2.9 billion. For the full fiscal year 2012, Micron had capital expenditure of approximately $1.9 billion. The company acquired Intel Corporation’s (NASDAQ:INTC) remaining 18% interest in IM Flash Singapore for $466 million, and also acquired IMFT’s assets at the Virginia wafer fabrication facility, for which Intel received a distribution from IMFT of $139 million. Additionally, the company received a $300 million deposit from Intel, which may be applied either to Intel’s purchases of NAND Flash under a supply agreement. Intel will continue to share the output of IMFT and certain research and development costs in proportion to its investments in IMFT.
Micron’s fundamentals are in line with the industry. Its primary competitors, Advanced Micro Devices, Inc. (NYSE:AMD), Intel (NASDAQ:INTC), and SanDisk (NASDAQ:SNDK), have also suffered due to overcrowding in this small market, leading to declining revenues and diminishing margins. These weak results, due mainly to the weakness in the PC market, should not cause investors a lot of concern. Micron will likely see a strong rebound in 2013 as more smartphone and thin PC devices that utilize Micron’s DRAM and NAND applications are launched on the market. There may also be substantial increases in revenue if the company succeeds in acquiring Elpida (ELPDF) of Japan, despite current bondholders’ objections. This will significantly increase Micron’s DRAM market share and provide benefits from Elpida’s recent contract with Apple Inc. (NASDAQ:AAPL) as the new SDRAM supplier for its devices. Acquiring Elpida will give Micron the second-highest market share of DRAM behind Samsung. The solution to the problems of the industry lies in consolidation, and the Elpida deal is critical to the fortunes of Micron. The bondholders want a better deal and have taken the matter to court, but there is a good chance that Micron will win. The impending launch of Windows 8 should provide a major boost if it really takes off. Ultrabook devices, smartphones, and tablets should all increase demand for DRAM and NAND as they become increasingly popular. The surge in demand didn’t entirely materialize proceeding the holiday season, but the long-term outlook is strong.
While Micron has reported losses for several consecutive quarters, and the oversupply in certain parts of the semiconductor market, combined with a squeeze on pricing, does not make an investment seem particularly attractive, the stock is attractively priced at around $5.80. Micron is trading between a 52-week low of $5.06 and high of $9.16. The current price results in a forward price/earnings ratio of about half the industry average of 15.0. I believe that there is considerable upside here because of the Elpida acquisition, the outlook for demand in the smartphone and tablet market, and the imminent launch of Windows 8. Now is the best time to buy Micron.
Disclosure: Long MU