Micron: Trade War Roadkill
Value investing requires bucking the crowd. Investing in unpopular companies or securities when everyone else has written them off. To have this type of mindset, you have to intellectually frame economic “problems” as opportunities.
The Trade War has started to create these types of opportunities. Given the constant uncertainty around the Trade War, it would be very foolish to make any prediction about when it will end or what type of resolution it will bring. But, some early casualties are starting to look like opportunities.
Micron Technology is the poster child for Trade War Roadkill. In the past year, MU’s stock price has declined 50% leaving its PE ratio at 3.06 with a price-to-book value of, drum roll, 1.05. Comparing MU stock to other SP500 Semiconductor names and you can see MU is an outlier.
Why would a company that is one of the preeminent memory chip makers in the world get destroyed like this? Reasonably simple, MU gets 41% of its sales from China and Mr. Market is pricing MU as if it will never make a sale again in China. And Mr. Market seems to be ignoring the fact that the only thing more certain than death and taxes is the never-ending increase in the amount of data processed and produced each day.
Clearly, the Trade War makes it difficult to price MU’s growth prospects, so can we define a backstop and determine a margin of safety?
Micron’s price-to-book ratio is 1.05, or close enough to say it is priced at its book value. Meaning, if we sold all of Micron’s assets (on its balance sheet) at market rates, we’d get an equivalent amount to its stock price per share. Diving into the balance sheet we find that most of that balance sheet is composed of cash, receivables (soon to be cash), inventory, and property/plant/equipment, which all have value on the market, and a very small amount of goodwill (an accounting entry that can’t be sold). So that price-to-book ratio is solid; we could get hard cash for Micron’s balance sheet.
When I value Micron, conservatively with a variety of growth rates and different models (in this post I discuss my methodology), my median valuation is $78/share, with the lowest at $36.
As I’ve mentioned before, valuation is an art based on lots of assumptions about future growth. My crystal ball got recalled a while ago, so I can’t tell you if and when MU stock would rise to my valuation. But my valuation does give me the empirical basis to believe that Mr. Market has unduly punished MU stock without rationally looking at its potential future prospects.
Finally, when evaluating a beaten up stock I think it is important to understand the company’s leadership; can they handle challenging situations? And ask if there is a realistic set of potential catalysts which would help the stock price realize its valuation? These are highly subjective answers and I leave those to the reader to reach their own opinion.
Until you have time to look at those questions, I think Micron is a Trade War opportunity. And I’m reasonably sure there are other opportunities out there to be found, so good hunting.