Micron (MU) PT Raised to $20 at Nomura on Normalized Margins and Share Price
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Nomura Securities analyst Romit Shah reiterated a Buy rating and raised its price target on Micron Technology (NASDAQ: MU) to $20.00 (from $16.00), saying they see normalized margins and thus share price.
"Amid a recovery in DRAM, we are taking an in-depth look at normalized operating margin, which strongly correlates (R squared 0.9) with price-to-book.," Shah said. "Our analysis indicates fair value of $20 per share based on operating margin of 10%."
Shah notes median operating margin in our semiconductor and semiconductor capital equipment coverage today is 32%. This is above a historical median of 26%. "The improvement in profitability is attributable to higher revenues, a more profitable end market mix (less consumer) and operational efficiencies," he comments. "While Micron has the lowest margins in the group, the company per our estimation also has potential to boost margins sustainably above its historical median."
He added, "We believe Micron can generate normalized operating margins of 10%, assuming revenues of $3.8b or $15b on an annual basis. This compares to a 5-year historical median of 8%, peak of 24% and trough of -10%." The firm's assumptions are based on the following points:
1) The median incremental gross margin over the last five years is 61%. The high was 67% in 2014 while the low was 57% over the last twelve months (Nov-15 to Aug-16).
2) We are assuming that Micron can generate 65% incremental gross margin over the course of this cycle, slightly better than a 5-year median.
Shares of Micron Technology closed at $15.51 yesterday.
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