Micron Technology, Inc. (NASDAQ:MU) crushed Wall Street estimates. But, Should you buy Micron stock now?
Boise, Idaho based Micron (NASDAQ:MU) reported its Q2 earnings yesterday (Sep 26), after the market close. Investors haven't stopped cheering and bidding the stock higher. After falling by nearly 2% in the trading session preceding the Q4 earnings announcement, the stock rose in after-hours trade and continued to rise in pre-market trade today. Micron stock was up by 4.3% at the time of writing, quoting $35.64 a share in pre-market trade, a gain of $1.46 over the last closing price. But, can Micron stock sustain the post-earnings momentum? Well, we think it can, and here is why.
Micron Q4 Earnings Gatecrash Expectations
Wall Street was expecting Micron to report Q4 earnings of $1.84 a share on revenue of $5.96 billion. The management had earlier guided for revenue to be in the range of $5.7 - $6.1 billion, and EPS to come in between $1.73 and $1.87 a share. And, how did the actual numbers compare against these estimates? Well, Micron crushed these estimates, even beating the high end of the Wall Street estimates as well as the management's guidance. The company reported revenue of $6.14 billion and earnings of $2.02 per share. These numbers towered over the year-ago quarter numbers when the company had delivered a 5 cent loss on revenue of $3.22 billion. Irrespective of the way you slice and dice the data, Micron easily crushed estimates.
The outperformance wasn't restricted to the past though. Micron management's guidance for Q1 FY2018 easily trumped estimates. The management guided for Q1 revenue to range from $6.1 billion to $6.5 billion and EPS to fall between $2.09 to $2.23 a share. For comparison, the average Wall Street estimate was anticipating Q1 EPS of $1.85 per share on revenue of $6.06 billion. The high-end of the Wall Street estimates called for a Q1 EPS of $2.15 a share on revenue of $6.49 billion. At the midpoint, the management guidance implies topline growth 59% and earnings growth of 575%, both on a year-over-year basis. So what exactly drove these strong results? And, can Micron continue to deliver such stellar numbers, going ahead?
The growth was broad-based, with DRAM and NAND segments seeing strong growth in volumes as well as ASPs. Quoting from the Micron Q4 earnings release, "Revenues for the fourth quarter of 2017 were 10 percent higher compared to the third quarter of 2017, with DRAM sales volumes 5 percent higher and NAND sales volumes 3 percent higher. DRAM and NAND average selling prices for the quarter increased 8 percent and 5 percent, respectively." The rising ASPs also led to higher profit margins, with Micron reporting a gross margin of 50.7%, a 380 bps improvement over last quarters number and a 32.7% improvement over the year-ago quarter's 18% gross margin.
A Strong Balance Sheet And Solid Cash Flows
Turning our attention now to the balance sheet, Micron closed the quarter with cash and cash equivalents of $6.2 billion. With current liabilities of less than $5.3 billion, Micron should have no problems in meeting in near-term obligations. In addition to the strong cash position, Micron has a debt-to-equity ratio of 0.57x. With an interest coverage ratio of over 10x, Micron financial position is pretty rock-solid. As Ernie Maddock, CFO of Micron, emphasized on the Q4 earnings conference call, the company aims to exit FY 2018 with a positive net cash position, which will be a huge improvement from the current net debt of nearly $5 billion.
The company generated free cash flow of $1.7 billion in Q4 and $3.3 billion for the year, compared to the negative $2.7 billion print in FY 2016. The free cash flow margin came in at 27.7% for Q4 2017 and 16.3% for FY 2017. If Micron can maintain the current annualized free cash flow rate, the company should easily be able to achieve its aim of a net positive cash position at the end of FY 2018.
Micron Stock Remains An Attractive Buy
Micron stock currently trades at 7X it's trailing twelve months (TTM) EPS. According to the management commentary, Micron will continue to ride industry tailwinds through FY 2018. Quoting Sanjay Mehrotra, President and CEO, Micron, from the earnings release, "We see DRAM industry supply bit growth of about 20 percent in calendar 2017, and expect it to grow at relatively similar levels in calendar 2018. The DRAM industry supply/demand balance is expected to stay healthy throughout calendar 2018, driven in part by ongoing strength in data center and Cloud computing trends." The CEO further added, " We expect industry NAND bit supply growth to finish calendar 2017 in the high 30 percent range. At these levels, supply remains below demand, which has created a constrained environment. As the industry continues to transition to 64-layer 3D NAND, we estimate industry bit supply growth in calendar 2018 will approach the 50 percent range, which should better satisfy the current unfulfilled demand."
In other words, Micron should be able to maintain strong topline growth, buoyed by industry tailwinds. This, in combination with the expansion in profit margins, should see the company maintain a solid earnings growth rate through calendar 2018. Given the expected strength in earnings, Micron stock is a steal at 5.3x the current FY 2018 estimate. Hence, long-term investors should buy this semiconductor play, and accumulate more of it on every dip.
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