Option Trade 
Micron Technology, Inc. (NASDAQ:MU) Calls 
Tuesday, March 21, 2017

** OPTION TRADE: Buy the MU APRIL 21 2017 26.000 call at approximately $1.35. Place a pre-determined sell at $2.70.

Note: No protective stop losses added -- but if you wish to do so make it $0.55.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

The Boise, Idaho-based Micron Technology, Inc. (NASDAQ: MU), a memory chip manufacturer, is set to post its most recent quarterly report on March 28. Many analysts indicate the stock is positioned for an additional boost on a strong earnings beat. Micron’s stronger-than-expected earnings have been driven by improved DRAM and NAND pricing and favorable supply-demand dynamics in an industry where many major suppliers exited during a 2014 slump. Further, the semiconductor manufacturer has benefited from an improved product mix and a solid demand for PCs, servers and mobiles that require its chip technology.

In the fiscal first quarter, Micron saw its shares surge after posting adjusted earnings per share (EPS) of $0.32 on revenues, up 23% on a quarterly basis, surpassing analysts’ consensus estimates. For the quarter to be announced later this week, analysts expect EPS to come in at $0.84 on revenue of $4.64 billion, compared to a loss of $0.05 per share on revenue of $2.93 billion reported over the same period last year.

In the last 30 days, the Consensus Estimate for the second quarter and fiscal 2017 witnessed upward revisions. For the fiscal second quarter, the Consensus Estimate is currently pegged at 77 cents per share, up 22 cents from earnings of 55 cents projected 30 days ago. The Consensus Estimate for fiscal 2017 is currently pegged at $2.33 cents per share, compared with $1.83 projected 30 days ago.

Micron Technology has a 12 month low of $9.35 and a 12 month high of $26.23. The company’s 50 day moving average price is $24.42 and its 200-day moving average price is $20.35. The stock’s market capitalization is $28.72 billion.

Influencing Factors to Consider               

The main reason behind the optimism surrounding the stock is improving prices for DRAM and NAND chips, which makes investors confident about Micron’s growth. Per various sources, DRAM and NAND prices have improved primarily due to a better product mix optimization and higher-than-expected demand for PCs, servers and mobiles.

The benefit from improved pricing is well reflected in the company’s last quarterly results. The company’s first-quarter fiscal 2017 revenues not only increased 18.5% on a year-over-year basis, but also surpassed the Consensus Estimate of $3.784 billion. Most importantly, it witnessed a 5% increase in DRAM average selling prices (ASP) during the quarter.

The company’s first-quarter adjusted earnings per share (excluding the impact of one-time items but including stock-based compensation expense) of 28 cents came ahead of the Consensus Estimate as well as the year-ago quarter’s figure of 24 cents.

It should be noted that Micron has been expanding in the SSD storage market due to the decline in the PC market. Notably, SSDs are faster and more energy efficient than traditional hard drives. These are also used in servers due to lower latency, thereby facilitating faster response to real-time applications.

Notably, the company has an interesting partnership with Seagate STX. Under the agreement, Micron supplies a significant portion of Seagate’s NAND requirement. In return, Seagate shares its SAS SSD technology with Micron – a key technology that the latter lacks in the enterprise SSD market. We believe that this deal will expand Micron’s high-value enterprise SSD portfolio.

Additionally, the acquisition of Inotera in 2016 is anticipated to be accretive to Micron’s DRAM gross margin, earnings per share and free cash flow. According to the company, the acquisition will also have some operational benefits, leading to efficient management of investment levels and cadence followed by alignment with global manufacturing operations.

The company anticipates the aforementioned factors to also have a positive impact on its fiscal second-quarter results.

Also, on the valuation front too, the stock looks attractive. The company currently trades at a forward P/E multiple of 11.2x, significantly lower than the categorized Electronics-Semiconductor industry average of 15.2x.

Analysts and Hedge Funds Opinions

Susquehanna analyst Mehdi Hosseini has weighed in on the upcoming fiscal Q2 report, indicating investors should not get too worried about Samsung Electronics’ DRAM production. Some have indicated that the Korean firm’s larger DRAM presence could threaten the favorable supply-demand dynamics that have boosted Micron’s shares.

As well, Instinet’s Romit Shah reiterates a Buy rating on shares of DRAM and NAND chip maker Micron Technology (MU), writing that the “setup” for the stock is “noticeably different” today than it was in 2014, when the stock last peaked, before beginning a 74% or so decline until last Spring.

A number of other analysts have also recently commented on MU…..

  • Needham & Company LLC reissued a buy rating and issued a $33.00 price target on shares of Micron Technology in a research report on Wednesday, January 11th.
  •  Zacks Investment Research raised Micron Technology from a hold rating to a buy rating and set a $25.00 price target on the stock in a research report on Wednesday, January 18th.
  • Stifel Nicolaus boosted their price target on Micron Technology from $34.00 to $40.00 and gave the stock a buy rating in a research report on Thursday, March 2nd.
  • Bank of America Corp raised Micron Technology from an underperform rating to a buy rating in a research report on Thursday, February 9th.
  • Finally, Pacific Crest reissued an equal weight rating on shares of Micron Technology in a research report on Sunday, March 5th.

Four equities research analysts have rated the stock with a hold rating, thirty-two have assigned a buy rating and one has given a strong buy rating to the company’s stock.

Analysts’ one-year price target estimate on Micron’s shares at $32.79 indicates an approximate 26% upside from its current trading price at $25.94.

Harvey’s Options Volatility Indicator

Conclusion

An encouraging top- and bottom-line guidance for the second quarter, way above the respective Consensus Estimate, have helped in boosting  confidence about the company’s future prospects.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the MU APRIL 21 2017 26.000 call at approximately $1.35. Place a pre-determined sell at $2.70.

Note: No protective stop losses added -- but if you wish to do so make it $0.55.

 

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