Technology

Why Analysts Think Micron’s Dilutive Stock Sale Is a Good Thing

Chris Lange

Published: October 11, 2017 1:55 pm

Last Updated: January 12, 2020 7:17 am

Normally when a public company looks to sell stock in an offering that is dilutive to current shareholders, most are against it. But in the case of Micron Technology Inc. (NASDAQ: MU), this offering could prove to be more beneficial than once thought, or at least that’s what analysts are saying.

After the markets closed on Tuesday, the firm announced a $1 billion common stock offering to redeem $438 million of 7.5% 2023 senior notes and to pay down an additional $562 million of debt opportunistically over time.

Credit Suisse has an Outperform rating with a $50 price target for Micron. The firm took a swing at this offering and argues that it accomplishes three objectives:

1. Accelerated Debt Reduction: Allows for accelerated debt reduction in a cost effective manner – indentures in the 2023 Senior Notes makes retirement vis a vis an equity offering $30 million cheaper than free cash flow (FCF).
2. Increases Flexibility of Onshore Cash: Micron has $2.7 billion of onshore cash, with 80% of debt onshore but 90% of cash flow generation offshore. In addition, of the fiscal 2018 CapEx of $7.5 billion, roughly $1 billion is in the US.
3. Achieves #1 and #2 with Minimal to No Dilution: Management argued the deal could be EPS neutral; our analysis suggest worst case 1% dilution to our fiscal 18 EPS of $8.00.

Credit Suisse continued:

Post the transaction Micron will have gross debt of approximately $10.7 billion – with a near term target to reduce to $8-9 billion – we suspect if management were truly worried about sustainability of FCF generation – the size of the offering itself would be significantly larger. Irrespective of today’s news, we continue to argue “stronger-for-longer” as supply metrics remain mostly behaved, capacity costs are structurally increasing, and new demand drivers in DRAM (Virtualization, AI, AD) and NAND (SSDs) are at least maintaining historic bit growth. In addition, we see strong visibility for DRAM prices thru calendar first half of 2018.

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A few other analysts jumped in on this offering as well:

• Merrill Lynch reiterated a Buy rating with a $55 price target.
• Nomura has a Buy rating with a $45 price target. The firm said that management is being financially shrewd and using its stock currency that is up substantially over the past 12 months to lower debt in the balance sheet.
• Stifel reiterated a Buy rating with a $46 price target. The firm noted that the timing of the offering may be suspect with a low P/E and with shares at a five-year high. Management is seen as being prudent in reducing the convertible debt and building up domestic cash.
• Mizuho has a Buy rating and a $45 price target.
• Wells Fargo reiterated an Outperform rating with a $45 price target. This megabank sees the strong cash flows from operations and moves to strengthen its balance sheet as creating value in the stock. The benefits of paying down the debt outweigh the dilution for a stock offering.

CNBC’s Jim Cramer noted that this was a positive for Micron and he thinks that Micron will have unbelievable numbers.

Shares of Micron were last seen up $41.88, with a consensus analyst price target of $48.78 and a 52-week range of $16.17 to $42.00.