Since I first published my overall bullish article on Micron (MU) here, the stock has appreciated by 38.8%, nearly tripping the return off of the NASDAQ (QQQ) over the same time period. The Street continues to rate the company near a "strong buy" and is markedly more reserved about Intel (INTC). Based on my review of the fundamentals, multiples analysis, and DCF model, I find stronger upside for Intel.
From a multiples perspective, Intel is the cheaper of the two. It trades at a respective 11.1x and 10.3x past and forward earnings with a dividend yield of 3.2%. Micron offers no dividend yield and trades at 20.3x forward earnings with greater uncertainty in earnings.
At the first-quarter earnings call, Micron's management reviewed the steps that it is taking to improve margins given pricing uncertainty:
On the operations side, IMFS continues to ramp and perform well. As we had mentioned the last quarter, I think within a month, we should be at full wafer starts. It's all going really according to plan, better than planned… [T]his facility has been ramping on our MLC technology. So I'd just point out that, obviously, that helps us a lot on the cost, but a lot of that product by virtue of the channel that goes into also lowers the average ASP for those, for the overall NAND bit. But there's 2 really, 2 good things that are embedded [ph]. We're ramping very successfully and it's resulting in a lot of bits being produced in that space.
Trends in DRAM and NAND have turned out to be much better than some feared with pricing holding well above the anticipated double-digit decline. Ultimately, Micron operates in a cyclical business and has been able to drive top-line momentum through successful R&D.
Consensus estimates for Micron's EPS forecast that it will turn negative at -$0.36 in 2012 and then dramatically take off thereafter. Assuming a multiple of 15x and a conservative 2014 EPS of $0.61, the rough intrinsic value of the stock is $9.15, implying 15.7% upside.
In light of the aggressive assumptions behind EPS growth for Micron, Intel remains the safer bet. Inventories for processors are decreasing and helping Intel's margins in the process as the company runs near full utilization. Mercury Research estimates a 4% sequential decline in microprocessor shipments in the fourth quarter. Intel now has 81% of the micro processor market, up 10 bps. This was driven by a dramatic 21% revenue growth in the fourth quarter off of solid momentum in PC sales.
Consensus estimates for Intel's EPS forecast that it will grow by 0.8% to $2.41 in 2012 and then by 8.3% and 9.6% in the following two years. Modeling a CAGR of 6.2% for EPS over the next three years and then discounting backward by a WACC of 9% yields a fair value figure of $36.69, implying 37.4% upside.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INTC over the next 72 hours.
