If only Micron’s prospects were as strong as its balance sheet

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I always thought playing Micron Technology (MU) to make money was a dangerous game. Well, that’s at least since the first time I got caught on the wrong side of one of the forward-looking tips. That said, the semiconductors were pounded, the memory was pounded, and I fell flat on this name.

Micron Technology has released its fiscal fourth quarter financial results. The results were really not that bad, compared to expectations, not to competitions a year ago. Management though? We will come to that.

For the three months ended Sept. 1, Micron posted adjusted earnings per share of $1.45 (unadjusted EPS landed at $1.35) on revenue of $6.643 billion. Bottom line performance beat Wall Street. But not only did revenue fall short of consensus, but printing showed a 19.7% year-over-year contraction. GAAP net income landed at $1.492 billion, compared to $2.72 billion (-45.2%) for the prior year period.

Digging deeper, adjusted gross margin was 40.3%, down from 47.7% for the prior quarter and 47.9% for the year-ago comparison. You think that’s bad? Check this out…adjusted gross operating margin hit the band at 25%, down from 36.4% for the prior quarter, and down from 37.1% for the year-ago comparison. Operating cash flow of $3.78 billion, however, declined less severely than $3.84 billion a quarter ago and $3.88 billion a year ago.

Step by step

NAND-generated revenue was $1.7 billion, or 25% of the company’s total revenue generation for the period. NAND sales were down 26% quarter-over-quarter and 14% year-over-year. Printed DRAM revenue at $4.8 billion. DRAM generated 72% of the company’s total revenue for the three months, while DRAM sales were down 23% quarter over quarter and 21% year over year.

DRAM vs. NAND: Those who know the difference or don’t care can move on. For the rest of you, DRAM (Dynamic Random Access Memory) is about 100 times faster than NAND and lasts 1,000 times longer. DRAM is used for temporary storage on servers and mobile devices, but it is more volatile and only works as long as it has access to power. NAND (flash) is non-volatile and can save data even when powered off, which is useful for permanent storage.

Tips

Although the fourth quarter was a bit rough around the edges, this is where it gets ugly…

For the first fiscal quarter – the current one – the company is forecasting revenue of $4 billion to $4.5 billion, which is well below the $5.65 billion that Wall Street had in mind. The company expects an adjusted gross margin of 24% to 28%, compared to 40.3% last quarter. The company expects adjusted operating expenses to be nearly $1 billion. Micon also sees adjusted EPS of -$0.06 to $0.14. Wall Street was looking for something around $0.65.

The CEO

The company’s technology and manufacturing leadership for DRAM and NAND, customer relationships, portfolio and balance sheet put Micron on solid footing, said Micron Chairman and Chief Executive Officer Sanjay Mehrotra. This will help the company “navigate a weakened near-term supply-demand environment,” Mehrotra added.

“We are taking decisive action to reduce our supply growth, including a nearly 50% reduction in wafer fabrication equipment capital expenditures compared to last year, and we plan to exit this down cycle. well positioned to capitalize on the long-term demand for memory and storage.”

Balance sheet

Micron ended the quarter with net cash of $9.331 billion. Printed inventory was $6.663 billion, up 18.4% year-over-year and 48.5% year-over-year. That brings current assets to $21.781 billion. Current liabilities total only $7.539 billion, mostly accounts payable. Micron’s current ratio is 2.89, which is exceptional.

Even omitting the inflated level entry for stocks, the firm’s quick ratio is 2.01. Mehrotra was not mistaken on the balance sheet, even if the level of stocks poses a problem.

Total assets are $66.283 billion, of which only $1.649 billion is “goodwill” and other intangibles, which is literally nothing. Total liabilities less equity is $16.376 billion, including $6.803 billion of long-term debt. Not only can this balance sheet withstand whatever the business has to do regarding inventory levels, but the business could also pay off its debt out of pocket at the same time. This is a top-notch record.

Wall Street

Since these earnings were released last night, I’ve noticed seven sell-side analysts who have given their opinion on Micron – and all are rated five stars by TipRanks. Opinions are really divided. After factoring in the changes, I count three “Buy” or equivalent ratings to Buy, three “Hold” or equivalent ratings to Hold, and one “Underweight” rating, which is considered equivalent to Sell. The average target price of the seven is $61.29, with a high of $100 (Hans Mosesmann of Rosenblatt Securities) and a low of $45 (Harsh Kumar of Piper Sandler). Omitting the high and low as outliers (and I think this high is really out of step with the rest of the group), the average of the other five drops to $56.80.

My minds

What is there really to say? You have a business that recognizes that it is currently seeing a drop in demand, while maintaining massive inventory. It’s definitely not optimal and will take some time to get used to. The company continued to buy back shares. During the reported quarter, Micron repurchased 13.2 million shares for $784 million. The company remains committed to returning 100% of free cash flow over time to shareholder returns. Bulls have that.

In all honesty, I appreciate a well-constructed track record and it’s hard not to make a name for myself when I see a track record like this. That said, there’s obviously a good reason for this 6x valuation of forward earnings and I think we’ve just explained it. I just saw Mehrotra on TV. He didn’t sound as enthusiastic as I’ve heard him in the past.

The title is trading a little this morning. This may be related to separate news this morning that Micron will receive up to $322 million from Japan to produce memory chips at a factory in Hiroshima. Even so, I don’t think I can bless buying this stock in force just yet.

The stock remains stuck in the same downtrend that the semiconductor industry and the market in general are stuck in. Our three most average-oriented moving averages are trending lower. Many portfolio managers won’t even dip their toes in the water until at least one of these averages heads north.

I think I need to see the central trendline of my Pitchfork pattern tested in order to consider any type of portfolio initiation. That probably means the $45 tier or cheaper. If that sounds interesting, the November 18 MU$45 put is paying around $1.65 this morning. If that gets too close to the last sell, the November 18 $40 put is trading at around $0.72.

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