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It Is Official, Micron Now Just a Value Stock

Micron Technology Inc. (NASDAQ: MU) may have managed to beat earnings and please on guidance, but a fundamental shift has been underway. For almost a year now, 24/7 Wall St. has been touting that Micron’s outside views were becoming that of a value stock, a transition that is often very painful for growth stocks. This was after a buyback announcement. Shares were above $30 at that time. That is not to imply that 24/7 Wall St. was saying it was time to short the stock, but now we actually finally are getting into what looks and feels like a true value stock scenario, since shares have been cut in half.

We again noted that analysts were starting to view Micron as a value stock in April. Now it is official: the analyst calls on Wall Street are starting to scream “value stock” and they finally may be right. This comes with a downside though, as value stocks rarely ramp up massively in share price, and they often linger in the value scrap heap for years.

Here are some of the analyst calls that 24/7 Wall St. has tracked on Friday after Thursday’s earnings report.

Credit Suisse’s John Pitzer maintained his Outperform rating but lowered the price target to $25 from $34. His take was that earnings were better than feared, along with a higher structural trough. Along with a lower target came lower earnings expectations. DRAM average selling prices were down 7% sequentially, with PC DRAM pricing down 17% sequentially. Credit Suisse sees Micron more insulated from market pricing, and the firm remains concerned about its second quarter. The firm sees trough earnings per share above break-even, with significant Micron-specific drivers ahead in its fiscal third quarter.

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Merrill Lynch maintained its Neutral rating and lowered its price objective to $17 from $19. The firm said:

Our Neutral is based on limited upside potential coupled with capex increase and weak earnings recovery through Fiscal 2016 to 2017. Capex increase by rivals could be a concern, in addition to demand downside. That said, we still assume positive return on equity and at least mid-cycle level of earnings per share (about $1 sustainable in FY16-17).

Morningstar lowered its fair value estimate to $23 from $25, noting that the 2015 headwinds are expected to persist in 2016. The firm’s quantitative valuation referred to it as undervalued. A quote noted:

While [Micron] shares still trade at a discount to our updated fair value and could be appealing to some long-term investors, we reiterate our very high uncertainty rating for this no-moat company.

S&P Capital has a mere Hold rating, but it lowered its 12-month target price to $20 from $26, with a revised peer-discount P/E of 7.8 times its fiscal 2017 operating earnings per share estimate, which has been introduced as $2.55 (EPS). S&P lowered its fiscal 2016 EPS estimate to $1.47 from $2.99.

Wells Fargo’s David Wong has an Outperform rating, but the valuation range is $16 to $19, based on a forward earnings multiple of 9.0 to 10.5 for the fiscal 2017 earnings per share estimate of $1.80. This multiple was said to be where Micron has traded at various times in the past, and there have been large swings in Micron’s profitability, which are likely to continue in the future.

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Micron shares were up 4% at $15.40 in mid-Friday trading. Its market cap is $16.6 billion, and it has a 52-week range of $13.50 to $36.59.

The reality is that volatile and spotty earnings make it very hard for analysts and investors to come to a meeting of the minds. That means that investors generally will pay less for a company’s earnings stream ahead. And guess what that means — a much lower P/E ratio, or a value stock.

By Jon C. Ogg


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