Looking at Micron's (NYSE:MU) results from Thursday evening, it is pretty clear that the chip market is not healthy. With memory chips filling such a fundamental role in so many devices, it does not seem out of line to say that "as goes memory, so goes chips." While memory has always been a volatile sector, there was not much in the Micron release to suggest that a big turnaround is on the way soon. And yet, with the stock trading at such an unchallenging multiple, it is worth asking if Micron is nevertheless a value today.
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A Ragged Fiscal Third Quarter
There was not much in the way of good news in Micron's fiscal third quarter report. Revenue fell 5% on a sequential basis and 7% from last year's level. In truth, there wasn't much strength anywhere. NAND sales fell 5% sequentially (with ASPs down about 5%) and DRAM sales dropped 7% despite a small uptick in price. In terms of operating units, Embedded Solutions and Wireless Solutions were strongest, which is not altogether surprising given the relatively better market for chips in automotive, industrial, server and mobile applications.
Margins and profits were very much a mixed bag. Gross margin improved three points on a sequential basis, but was down sharply from the year-ago level. Interestingly, Micron reported that it's cost per bit was down about 4% in DRAM, while up about 12% in "trade" NAND. Operating income was likewise mixed - up 32% from the second quarter, but down more than half from the year-ago level. These margins were rather disappointing and Micron missed the analyst estimate target by a wide margin.
PCs Weak and Mobile May Be Softer
PCs are still about 20% of Micron's business and the weak PC market is crimping results here. Likewise, the mobile may be more of a problem than people think - Nokia (NYSE:NOK) continues to lose share and non-Apple (Nasdaq:AAPL) tablets have yet to take off in any meaningful way. Although mobile DRAM is not nearly so important for Micron as it is for Samsung, Hynix or Elpida, it is still represents a growth driver that the company arguably needs.
What Is a Top Spot in a Tough Market Worth?
Micron may well have some edges in technology (and/or production technology) relative to the likes of Samsung, but how much is that really worth? Yes, Micron is a leading player in DRAM and NAND, but these companies are price-takers. What's more, Micron does not have the advantage of captive demand for smartphones and tablets like Samsung does.
Along similar lines, Micron can boast of top-notch customers like IBM (NYSE:IBM), Hewlett-Packard (NYSE:HPQ), Sony (NYSE:SNE) and Apple (Nasdaq:AAPL), but what is that really worth? Any of these customers could switch to a rival like Samsung or SanDisk (Nasdaq: SNDK) with little fuss or disruption.
The Bottom Line
Despite the problems in the May quarter, and the softer guidance for the fiscal fourth quarter, Micron nevertheless looks cheap. True, the company is facing a lawsuit from Rambus (Nasdaq:RMBS), but Micron would seem to have a fair chance of sailing through that without major injury.
A cash flow model on Micron seems all but ridiculous, as the company's free cash flow production has always been so volatile. That said, the company is trading at the lower end of its range on metrics like price-to-book and that suggests it may be worth a look. This is no widows-and-orphans stock, nor a candidate for a long-term buy-and-hold, but today's stock price may just be too cheap relative to the ongoing demand for memory in all manner of consumer and industrial products. (For more, see The Essentials Of Corporate Cash Flow.)
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