I entered long on Micron around February of this year at $43.55 based on their intrinsic value of around $88 calculated using Discounted Future Cash Flow but have since noticed some accounting practices which I take issue with within their balance sheets, income statements, and cash flow statements.
I've since further examined their income statements from 2013 to 2017. While in 2013, MU recorded an Unusual Income of $1.378 Billion, the subsequent 4 years (2014 to 2017) showed recurring Unusual Expenses of $288 Million, $34 Million, $67 Million and $25 Million. Four years in a row of "Unusual" Expenses? By my definition, these expenses are no longer truly unusual and this is a bad sign of potential accounting trickery to fluff the income statement.
Upon examination of Micron's (MU) 2017 balance sheet reports a Goodwill net income of $1.228 Billion. In my mind goodwill income is a misleading spin on the company having potentially overpaid for an investment. "Goodwill" should more accurately read "We Hope So". I'm not putting my capital on the line for the Goodwill assets of a company who has managed to lose over $1 Billion every year in capital expenditures (investing) [in millions from 2013 to 2017 the company lost $1,910 (13), $2,902 (14), $6,232 (15), $3,068 (16), and a whopping $7,537 (17)]. With that track record I'm not overly enthusiastic about the reliability of 2017's Goodwill numbers.
The kicker to all of this is that Micron does not pay a dividend. In conclusion, no thank you, I'm out, but best of luck. I withdrew my position in Micron in two separate withdrawals, first on 7/19 at $56.435 then today (7/27) at $53.59. My funds will be allocated to holdings in an undervalued company with a transparent balance sheet, cash flow, and income statement yet to be determined.
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Another thing I forgot to mention is that their shares are controlled predominantly by institutions (somewhere around 75%) this can cause some significant price volatility including in after hours trading where it's a bit more difficult for little guys like me to make any sort of portfolio adjustments.
Any goodwill Micron paid for their acquisitions has been money well spent. They basically bought the Taiwanese and Japanese assets out of bankruptcy during industry downturns, which accelerated industry consolidation and enabled the massive profits we see today. There are still remnants of the difficult times on their balance sheet, but the future looks much brighter. The company is now faced with a much easier decision... what to do with all the extra cash that can't be reinvested in their business? How much should go to buying back stock vs. paying a dividend? As the stock is currently trading at less than 4x annualized earnings, buybacks will have a significantly positive impact on EPS.
QuileHills
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@wthrow831, If in the future MU decides to offer a dividend which gets paid out steadily for some years in a row I'll certainly consider reinvesting. They're stock price could certainly keep heading up but the way I'm setting up my holdings right now, I'm looking for the stable history (including dividends) and a margin of safety on the balance sheets over aggressive growth. They gave me a good return for the time I held them, and I'm happy about that but, like I said, it's just currently not what I'm looking for in my portfolio.
rudyae86
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Is there a way to explain this in layman terms? I'm confused :(
brettarenz
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The goodwill assets were transferred from the Inotera balance sheet upon acquisition. I believe the purpose was to maintain the Taiwanese surtax deduction.
QuileHills
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@brettarenz, it's generally something I do not like to see. If it was a much smaller number I would be more comfortable overlooking it but it's 20% of their before tax income for 2017.
brettarenz
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@QuileHills, point taken, I just think there are valid reasons. It's also 9% of TTM before tax income :)