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is Micron ticker mu a stock to buy now welcome to Global value in today's video we're performing a fundamental analysis of Micron using Warren Buffett's investing framework we'll look at six key financial metrics before we figure out three different Fair values to understand what Micron is worth in today's stock market plus I'll share a special bonus that could be the deciding safety Factor when adding Micron stock to your portfolio right now Micron stock trades for $13.89 per share in its last day of trading alone it's down 1.99% however since July of 2023 Micron has beat the market their stock prices up 103% and they're one of the top performing stocks beating the S&P 500 that's only up 20% over this time in The Last 5 Years Micron has compounded at an insane 25.6% annually in the last decade they're also a strong outperformer compounding at 15.5% annually this continues to be the case when we go back before the global financial crisis in in the last two decades Micron has beat the market and they're compounding at 14% annually on top of this Micron pays a small dividend yield of 0.34% this is added to their stock gains and it's even bigger returns for shareholders however note the Cycles in their business today Micron trades $27 below their 52e high this is still up more than double from their 52e low and Micron is pretty big they have a $148 billion market cap getting started with our first metric we want micron's average Returns on Capital to be greater than 14% these returns tell us if a company creates value an average company only earns 7% so we can build in margin of safety here based on their quality Micron earns cyclical but above average returns throughout most of its cycle however the company has seen a downtrend in their most recent year to end 2023 they actually had negative Returns on Capital this meant they destroyed value for shareholders still when things are averaged out Micron earns 9 % Returns on Capital over this time these are just slightly better than average but below the Benchmark we wanted it's an x on our first metric now what does Micron really do Micron is one of the largest semiconductor companies in the world specializing in memory and storage chips its primary sales come from Dynamic random access memory or Dam and it has minority exposure to not and or nand Flash chips Micron serves a global customer base selling chips into Data Center Mobile phones consumer electronics and Industrial and Automotive applications Micron is vertically integrated and headquartered in Boise Idaho next we want growth in their sales earnings and free cash flows with slightly better than average returns this can mean more for shareholders here again we see the Cycles in micron's business the company was down in 2020 and then rebounded until 2022 then in 2023 things really took a hit for the company and they're still down in 2024 Cycles have historically plagued the dram Market because it's a commodity business with large leg times it takes time for factories to come online and there's a lot of global competition due to this in the Last 5 Years Micron sales are down 9% their earnings are negative today and that's also the same with their free cash flows all three of these are down and it's an axon metric number two right now micron's owned by five Super investors led by gu spear who has 10% of his portfolio invested in the company the Canadian Warren Buffett Prem wato also has a nearly 7% position but he trimmed this by nearly half in the last quarter Micron was formerly a big holding from monish p and Lee the Chinese Warren Buffett yet maybe coincidence both of them sold out completely in the second quarter of 2023 next we want their earnings per share to be up unfortunately this isn't the case for micron their earnings are negative today which despite 4% share BuyBacks this is still an X for the business so far things aren't looking so hot even though the company's stock price has red in the last year next we want free cash flow per share growth this is similar but even more important because free cash flows are the lifeblood of a business for micron their cash flows are also negative in 2023 and in their last 12 months they were positive in all four the rest of these years but that's not the case today it's another X on Metric number four concerning for shareholders is that Micron started paying dividends again just in the last few years they kicked this off with a small dividend in 2021 and today there's 0.34% shareholder yield is not supported by their cash flows this can cause issues as they have to get cash from other places to pay out these dividends this could get better as they make more profits but it's not great to see right now for micron next in recessions it's companies with too much debt that can have the biggest losses and even go broke thankfully Micron has had net cash in four of the Last 5 Years this helped them cushion the blow as their free cash flows went negative in 2023 Micron burned some cash and added debt over this time and they ended 2023 with $3.5 billion worth unfortunately in The Last 5 Years when their cash flows are added together micron's only brought in $2.9 billion worth that's not enough to support their net debt position and it's another X on Metric number five things so far are pretty rough for micron even though their stock pric is soaring still the company's worth something and before we figure out what micron's worth it's time for our bonus safety metric Warren Buffett's teacher and the father of value investing Ben Graham wanted to see a current ratio greater than 1 and 1 half times this measures how a company's total current assets can meet their current liabilities in other words how can a business pay its bills in a hurry great to see here for micron shareholders is they have a big current ratio it's been above 1 and a half times in all five of the last years and that's also the case today it's a solid check our first of the day on our safety bonus so maybe not all hope is lost for the business the big metric of the mall metric number six is also our first valuation we want micron's average cash flows divided by their Enterprise Value to give us a yield greater than 5% this is in line with the historical yield from the S&P 500 and it would give a risk premium to the 10-year treasury unfortunately again today Micron has negative cash flows but in an average year over this time on sustainable earnings they can bring in around $3 billion worth when we divide that by their $153 billion Enterprise Value it only gives us around a 2% average free cash flow yield that's under the market we wanted and it looks like their stock price is out ahead of itself this is an x on Metric number six but don't just throw the business out we still have two more valuations to look at before we put them together for micron's fair value at the end of the video next we'll use a DCF model to credit Micron for its growth and its net worth let's take an average of their normal free cash flows and grow these out into the future using historical assumptions if we say that their cash flows grow at 5% in each of the next 10 years and then 4% in the 10 years following that then if we also add in their tangible Book value to get an estimate of their net worth if we want a market beating 15% rate of return which is what Warren Buffett wants from his Investments today this DCF valuation says micron's fair value is just under $60 per share that's less than half their current stock price but keep in mind Micron is a cyclical business and they haven't been that predictable in the past our third valuation uses future assumptions and past multiples and today it says micron's worth $66 per share this is not the first time microns had a big climb in its stock price the company last popped during the dotom bubble then traded all the way low as $3 a share during the global financial crisis since then it's up more than 40 times now Warren Buffett likes the numbers but it's the qualities of a business that are his true love why don't we learn what these are for micron through a long and a short thesis we'll start with a long thesis first number one when memory markets are in an upswing and demand is strong micron's sales growth and profitability can be impressive what hurts them on the downside helps them on the upside number two Micron is a major producer of dram and Nan chips with healthy market share positions this allows it to benefit from secular Trends toward AI 5G and connected cars number three Micron shareholder returns and its balance sheet have been strong especially for a cyclical company but it's not all positives let's look at a short thesis as well number one micron has a high fixed cost basis this leaves it vulnerable to underutilization charges and a major profit decrease when memory markets enter a downturn like we're seeing in the last couple of years number two dram and nand are commodity likee products Micron has little ability to build durable differentiation against its competitors from a patent and Tech perspective Micron is ahead of its Global peers especially in China number three though Micron has meaningful China exposure and it Bears the risk of further restrictions out of that market which would hamper its sales now let's put everything together for micron as we reviewed Micron we see that this is a cyclical commodity like business that unfortunately goes Z for six on our analysis Micron was once in the portfolios of leelu and monish pry two very esteemed value investors who shared a similar thesis unfortunately with restrictions in China and geopolitical risk for the company even though their stock price has rallied it doesn't look cheap today this isn't financial advice when we put everything together for micron and look at its numbers and its business quality ities today a fair value only comes in at $51 per share that's more than 60% down from their current stock price and it's even below their 52 we low to find stocks that are undervalued sign up for our investing tools and get exclusive bonus coverage of 100 stocks in counting
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