·Abbreviations:
o My Estimate of Fair Value (MFV)
o Return on Invested Capital (ROIC)
o Operating Earnings (OI)
o Enterprise Value (EV)
o Price-to-earnings Ratio (PE)
o Liquidation Value = Tangible Book Value (TBV)
o Book Value (BV)
Micron is engaged in the semiconductor business. To me, that’s not particularly relevant. What’s of greatest relevance is the differential between its market value and MFV. But, before we get to those calculations, I measure the stock via a scorecard to highlight indicators that might make the stock more or less likely to be a winner. Correspondingly, pros and cons as I see them.
Pros:
·The P/E is <10
o I love cheap stocks, and for others that do too, this is most likely the measure of relative value they are using
·The company is also cheap using OI/EV (~.12), my preferred relative value measure
·The % of shares short is <5%
o Shorts take greater risk than (non-margined) longs, so I assume they’ve done some research before betting against a company
·The company’s debt relative to its Market Cap is <25%
·The company’s balance sheet seems excellent, and BV has grown nicely over 5 years
Cons:
·Operating Profit Margins are down sequentially and year-over-year
Those pros and cons and—more importantly—the company’s average ROIC (~16 over the last 10-years) make it seem likely that the company has durable competitive advantages. So, I deem the company good quantitatively. I am willing to assume—speculate—that durable competitive advantages will allow the company to grow earnings over time and therefore I value the company relative to $7.5b OI, my estimate of what the company can reasonably earn over an average year. Given the company’s seemingly excellent balance sheet and 5-yr average multiple of PE x 13.2**, I think OI x 10 is a reasonable fair value, which equates to MFV of $66.12.
At a recent price of $49.79, the differential between market value and MFV is -25%, thus I think shares are undervalued.
Conclusion: The semiconductor industry is cyclical and currently in a downtrend. Since I look at longer time periods, my scorecard and MFV are slow to reflect short- to medium-term downtrends. Thus, it’s probable my valuation vs. OI will decline in the coming months, especially since Micron is forecasting an operating loss in Q2. Yet, even if I decide to value the company vs. liquidation value to account for OI volatility, I don’t think a valuation of less than TB x 1.5 is reasonable, and TB x 1.5 is $65.57, not far from my OI MFV.
I’m a long-term owner of Micron shares and have been a net-buyer this week.
My positioning: Long shares and call options
For more information about how and why I designate companies good read here: (https://www.veriteventures.com/post/how-i-value-good-companies)
-V
*Post prepared using data as of 12/22/22
**I’m using the company’s historical PE multiple as a proxy for OI because PE multiples are more readily available from data providers and because I will never pay more than the lessor of 1) OI x 10, 2) OI x the company’s own historical multiple, or 3) the S&P 500’s current OI multiple, which lessens the risk of over overestimating the company’s historical multiple via the PE to OI conversion.
The information in this post has not been audited and accuracy is not guaranteed. The post is for informational purposes only and is not investment advice. Consult a financial professional before making investment decisions. The author’s opinions and positions may change subsequently, without notice.