Conclusion: An improving balance sheet, a record FCF year, and a divorce from a quasi-parent who wanted MU to be a blunt instrument, all set the table for MU to re-set the company's future in the high stakes memory markets.
Present:
There is a price for risk. 10% trailing FCF and potentially 20% forward FCF yield on shares of MU at this level seem attractive. We are moving from Bench Long to Best Idea Long. Our bull case is $50-55 as we are ~20% above Street on F18E EPS.
Future:
A drastically positive balance sheet reset, a record FCF year, and divorce from a quasi-parent who wanted MU to be a blunt instrument, all set the table for MU to re-think their future in the high stakes memory markets.
DRAM:
Shrinking line widths will continue to drive supply growth steps in memory. There is some disagreement about the role of EUV in this category that could lead to +/- on share loss for Micron.
It is time for the industry participants to invest in future memory alternatives. That will require a rising investment curve for Micron (investment as % of sales is R&D + Capex).
NAND:
The Intel breakup is a potentially awesome wake up call for Micron: you don’t have to be a memory manufacturer forever. Why not MCU? MU is a $47b company and MCHP is a $21b company. Or why not pitch QCOM on buying large parts of Freescale as QCOM absorbs NXP (with FSL inside). The shopping list should include Maxim, ON Semi, CREE, and II-VI, among others.
Bottom line: it is time for MU to diversify. Betting big on Memory from here will have rising headwinds including new flavors of post-DRAM tech that may or may not favor the company, the entrance of China into memory, the entrance of Intel into NAND as a standalone competitor, the aims of Samsung to continue to gain market share.
Or, if the company sticks with the long term plan, wait for NAND prices to suffer and then offer the PE buyers of Toshiba Memory a way out. Micron is seen as a Japan-friendly buyer of technology assets. This approach would be consistent with the current mission of the company, but likely means the upside is limited this cycle, and the hopes for next cycle are a long technology restructuring story in Japan.
Our view: use the FCF and balance sheet reset to alter the course of Micron’s future and inorganically set sail for areas of the semiconductor landscape with better long term harvest. We are adding MU to Best Ideas Long. We do not intend to hunt for data points as aggressively as last go-around with MU, this is more of a perspective call on the company's opportunity to reset their long term multiple and valuation.