The Company That Worries Apple

02/21/2011 12:10 pm EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Rising demand for flash memory could mean a bonanza for Micron as buyers like Apple are forced to pay up, writes Ian Wyatt of Top Stock Insights.

Popularized by Apple (Nasdaq: AAPL) last year, the iPad combines all the software features of a laptop with hardware that is half the size. The hinged keyboard has disappeared and has been replaced with a touch screen.

Why did it take so long to make such a device? One of the major reasons is that the needed hardware components could not fit in so small a space until very recently. Now those components have shrunk, and the popularity of the product is surging.

Micron Technology (NYSE: MU) designs memory cards, and the upgrades it made to the NAND flash technology enabled tablet makers to use smaller, cheaper and faster memory chips.

Wyatt Chart

No Flash in the Pan
Advanced handheld devices have finally emerged. Apple sold 16.2 million iPhones in the first quarter of 2011, which represents an increase of 7.5 million units—or 86% growth from the same period in 2010. Net sales of iPad and related products and services totaled $4.6 billion, with 7.3 million units sold during the first quarter of 2011.

Analysts expect the growth to speed up. Morgan Stanley expects tablet device shipments to reach 24 million this year, up from 2 million in 2009. Next year Morgan Stanley expects shipments exceed 36 million, expanding to 49 million in 2013.

Apple is worried its prices may increase in the near term. And that may bode well for the margins of its suppliers.

Acquisition Paying Off
Micron has become even more formidable after its acquisition of Numonyx, which boosted its manufacturing capability in chips for cell phones, digital cameras, MP3 players, computers and other high-tech equipment. The Idaho-based company gained market share last year and became the world's third-largest NAND supplier.

Micron had a terrific first-quarter financial report. Revenue increased by 28% to $2.2 billion. Operating income surged to $390 million from $201 million last year.

Net income declined to $155 million, or $0.15 per share, because of restructuring costs. Despite the drop in income, cash flow from operations increased 125% to $732 million.

Sales fell short after selling prices declined late last year. Management predicts a recovery in pricing this year even as production increases across all segments. [Micron’s CEO explains why here—Editor.] Additionally, sales still grew at 28% despite a decline in prices, and they could go much higher this year if pricing is favorable.

Betting on Higher Prices
Analysts expect pricing power will come back this year and next in a big way. For 2011, analysts expect sales of about $8.9 billion and earnings of $0.54 per share. Next year, as pricing stabilizes (and production increases) analysts expect sales to grow to $10 billion and earnings per share to increase to $1.11.

The stock, which closed at $11.70 on Friday, trades at 23.4 times current and 9.6 times forward-year earnings. For some perspective, the industry currently trades at a price/earnings ratio of 25. For Micron, that would work out to almost $13 per share.

As device makers hope to take on Apple's iPad in 2011, a variety of devices will come onto the market and place significant strain on component makers as demand increases. Micron is a great company that should see demand for NAND increase. Additionally, pricing power should return as the tablet trend matures. Shares of Micron are a good buy below $12.

[Flash memory is not the only chip sector faring well. A month ago, Paul McWilliams recommended signal-processing chips specialist Analog Devices (NYSE: ADI). Chinese cellular supplier Spreadtrum (Nasdaq: SPRD) has fared even better since Nicholas Vardy profiled it in December. Jim Jubak names a supplier of chip-making equipment poised to cash in on the current boom—Editor.]

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