Name That Trade – Is $MU Through?

by CC October 1, 2015 12:16 pm • Commentary

Event: Micron reports their fiscal Q4 results tonight after the close. The options market is implying about a 9% move, with the stock at $14.55, the Oct 2nd 14.50 straddle (the call premium plus the put premium) is offered at $1.35, or about 9% of the underlying stock price.  If you bought that, and thus the implied event move, you would need a move above $15.85, or below $13.20 by tomorrow’s close to make money.

Price Action / Technicals: MU is down 58% on the year, which was essentially a 13 year high, and now only about 7% from its 52 week lows made on August 24th.

The stock appears to be at a near term support level, but the stock has failed on multiple occasions in the last six months when it seemingly looked poised to put in a double bottom:

[caption id="attachment_57316" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

On a longer term basis, it’s hard to spy too much support until $9-10. I know that sounds like a dire technical downside scenario, but remember the stock went from $9.50 to $15 from late April 2013 to late June 2013, on its way to $35 in early Jan. The point here is that when the stock was in the midst of a near 600% rally from its 2012 lows there were few questioning the two month, $5, or 30% rallies that existed then.  It shouldn’t be such a surprise if it does it on the downside:

[caption id="attachment_57317" align="aligncenter" width="600"]MU 5 year chart from Bloomberg MU 5 year chart from Bloomberg[/caption]

Implied Volatility Snapshot:  Short dated options prices have remained elevated since its late August lows, but with 30 day at the money implied vol near 70%, it remains well below the levels in October 2011 when the stock was being priced for bankruptcy, and traded as low as $4:

[caption id="attachment_57319" align="aligncenter" width="600"]MU 5yr chart of 30 day at the money implied volatility from Bloomberg MU 5yr chart of 30 day at the money implied volatility from Bloomberg[/caption]

Estimates & Forecasts from Bloomberg:

-4Q adj. EPS est. 33c (range 24c-47c)

-4Q rev. est. $3.56b (range $3.42b-$3.68b); June 25, MU forecast $3.45b-$3.7b

-4Q gross margin est. ~27.1% (range 24.0%-30.2%)

-1Q adj. EPS est. 40c (range 20c-73c)

-1Q rev. est. $3.76b (range $3.29b-$4.14b)

-FY16 capex est. $4.68b (range $2.94b-$5.57b)

OUR VIEW:  At some point in the last few quarters the stock started to dramatically discount the potential for the sort of year over year revenue growth the company experienced (at 40%) from 2013 to 2014 as the company is now expected to report sales for their 2015 year of down 1%.

The stock now trades at only 7x next year’s expected earnings, and many longs will speak of attractive valuation.  Regular readers know our views on cheap stocks that get cheaper due to cyclical downturns in commodity businesses.  They are a value trap on the way down. Just as MU overshot on the upside it can do so on the downside.

And this is not even a situation where shorts have been riding the thing down the whole way, as short interest sits at only 6% of the float.  Plus the analyst community remains overwhelmingly bullish with 26 Buy ratings, 8 Holds and only 1 Sell!  The street has yet to capitulate. The stock is clearly a tough press on the short side, but I am not sure it is washed out enough to suggest the selling is close to done. We would be sellers on rallies.