A successful portfolio manager is aware of the fact that adding well-performing stocks at the right time is of vital importance. Indicators of a stock’s bullish run include a rise in share price and strong fundamentals.
One such stock that investors need to hold onto right now is Micron Technology Inc. (MU - Free Report) . Though there are a few concerns, these are short lived and the stock has the potential to perform well over the long run.
Micron’s share price movement has been quite favorable. In the last one year, its shares have gained 159.8%, while the Zacks categorized Electronic-Semiconductors industry recorded growth of 47%.
Let’s look at the reasons behind Micron’s solid momentum.
What’s Driving the Stock?
The main reason behind the optimism surrounding the stock is improving prices for DRAM and NAND chips, which makes investors confident about Micron’s growth. Per various sources, DRAM and NAND prices have improved primarily due to a better product mix optimization and higher-than-expected demand for PCs, servers and mobiles.
The benefit from improved pricing is well reflected in the company’s last quarterly results. The company’s second-quarter fiscal 2017 revenues not only surged 58.4% on a year-over-year basis to $4.648 billion, but also surpassed the Zacks Consensus Estimate of $4.645 billion. Most importantly, it witnessed a massive 21% increase in DRAM average selling prices (ASP) during the quarter.
The company’s fiscal first-quarter adjusted earnings per share (excluding the impact of one-time items but including stock-based compensation expense) of 77 cents came in line with the Zacks Consensus Estimate.
Encouraging top- and bottom-line guidance for the fiscal third quarter, way above the respective Zacks Consensus Estimate, also helped in boosting investors’ confidence about the company’s future prospects.
Upward Estimate Revisions
Since its last quarterly results, the Zacks Consensus Estimate for the fiscal third quarter and fiscal 2017 witnessed upward revisions. For the fiscal third quarter, the Zacks Consensus Estimate is currently pegged at $1.37, up from earnings of 68 cents projected 90 days ago. The Zacks Consensus Estimate for fiscal 2017 is currently pegged at $3.67 compared with $2.33 projected 90 days ago.
Other Driving Factors
It should be noted that Micron has been expanding in the SSD storage market due to the decline in the PC market. Notably, SSDs are faster and more energy efficient than traditional hard drives. These are also used in servers due to lower latency, thereby facilitating faster response to real-time applications.
Notably, the company has an interesting partnership with Seagate (STX - Free Report) . Under the agreement, Micron supplies a significant portion of Seagate’s NAND requirement. In return, Seagate shares its SAS SSD technology with Micron – a key technology – that the latter lacks in the enterprise SSD market. We believe that this deal will expand Micron’s high-value enterprise SSD portfolio.
Additionally, the acquisition of Inotera in 2016 is anticipated to be accretive to Micron’s DRAM gross margin, earnings per share and free cash flow. According to the company, the acquisition will also have some operational benefits, leading to efficient management of investment levels and cadence followed by alignment with global manufacturing operations.
Micron is positive about the product launches and growing demand, particularly that of SSD products. The company has been constantly innovating memory technologies, spanning DRAM, NAND and NOR Flash memory solutions, which are widely used in the latest mobile computing devices, as well as in consumer, networking and embedded products.
We also believe that any increase in prices will have a favorable impact on the company’s overall results. We anticipate these benefits to be a tailwind for the company, going forward.
Looking at the improving selling prices for DRAM and strategic initiatives of expanding in the SSD market, we consider that Micron is one such technology stock which is worthy of remaining in investors’ portfolio.
On the valuation front too, the stock looks attractive. The company currently trades at a forward P/E multiple of 8.6x, significantly lower than the Zacks categorized Electronics-Semiconductor industry average of 15.7x. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings. Therefore, lower the P/E of a stock, the better for a value investor.
Additionally, the stock has long-term earnings per share growth rate of 10% and it carries a VGM Style Score of “A”.
Therefore, in our opinion, the stock deserves a place in investor’s portfolio. Currently, Micron carries a Zacks Rank #3 (Hold).
A couple of better-ranked stocks in the Electronics-Semiconductors space are Applied Optoelectronics, Inc. (AAOI - Free Report) and Broadcom Limited (AVGO - Free Report) . While Applied Optoelectronics sports a Zacks Rank #1 (Strong Buy), Broadcom carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term expected EPS growth rate for Applied Optoelectronics and Broadcom is 20% and 13.6%, respectively.
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