I am currently writing the graduation thesis about the evaluation of technology companies in the American stock market. In the chapter on valuation based on market multiples, I identified a technology company, Micron Technology Inc (NASDAQ:MU), with a very low P / E (TTM) multiple. Intrigued, I tried to apply the discounted cash flow analysis
Company Description
Micron Technology, Inc. is an American global corporation based in Boise, Idaho. The company produces many forms of semiconductor devices, including dynamic random-access memory, flash memory, and solid-state drives. Its consumer products are marketed under the brands Crucial and Ballistix. Micron and Intel (NASDAQ:INTC) together created IM Flash Technologies, which produces NAND flash memory. (source: Wikipedia)
In the last 5 years Micron has seen its prices grow by about 350%, despite this, it is still undervalued, at least according to the multiple P / E.
In the image below you can perceive the underestimation of the company, by comparing the company's multiple P / E (TTM), the sector in which it operates (technological), the industry (semiconductors), the market (S & P 500) and of its main competitors (Intel, Nvidia, Texas Instruments (NASDAQ:TXN) and Applied Materials (NASDAQ:AMAT)).
Discounted Cash Flow (DCF)
The DCF evaluation of Micron Technology will be based on a model I created, built on the basis of the theoretical concepts extrapolated from the book "Valutazione delle imprese" by Aswath Damodaran.
For reasons of space, I will not explain in detail the calculation of each input of the model, unlike what was done in the thesis / book.
STARTING DATA OF THE MODEL:
In the image is shown the screen of the model where all the accounting data are collected, and not, of the company. (in billions of dollars)
STEP 1: Discount rates
(updated data to 05/18/2018)
STEP 2: Reinvestment rate and free cash flow to the firm (FCFF)
STEP 3: EBIT after taxes growth rate
The growth rate is determined as the company reinvests (reinvestment rate) and the quality of reinvestments (ROIC). (assuming that ROIC remains stable over the next few years)
STEP 4: Growth model (high growth (5 years) + stable growth)
When an enterprise moves from a phase of high growth to a stable growth phase, it is necessary to attribute to it the characteristics of mature enterprises with stable growth:
Cost of equity.The beta is taken from the value of 1.44 to 1.2 (the limit established for companies operating in more volatile sectors).
Excess returns. We hypothesize a lack of excess returns during the stable growth phase, thus setting the return on invested capital (ROIC) at a value equal to that of the cost of capital (WACC).
Reinvestment rate. Businesses in a stable growth phase tend to reinvest less than those in the high growth phase, so we can express the reinvestment rate, in the stable growth phase, as the ratio between the stable growth rate and the ROIC that the company can support in the phase of stable growth.
Stable growth rate. Since no company can grow to infinity at a rate higher than the general growth rate of the economy, we establish the perpetual growth rate in the phase of stable growth equal to 3,060%.
STEP 5: Equity value
CONCLUSIONS:
Micron Technology shows a 39.66% potential, starting from the closing price of Friday 18 May 2018.
EXTRA:
Micron has closed the year 2017 in the month of August. Therefore, for these calculations, "old" data of six months were used. Making some hypotheses, it is possible to repeat the procedure to take into account the past six months (two quarters), using the EBIT TTM (sum of the last four quarters) net of taxes.
DATA:
We use the estimates made previously relating to the WACC, reinvestment rate, ROIC and expected growth rate of EBIT after tax.
EBIT TTM, after taxes, jumped from $ 4,262 billion in August 2017 to $ 8.113 billion in March 2018.
DISCLAIMER:
The information contained in this article represents my personal analysis / opinion and does not contain a recommendation for an investment or a particular stock.