Micron Guides To Over $3.50 In Earnings Per Share
Disclosure: I am long MU.
Given a company's Free Cash Flow and its Capital Expenditure forecast, one can work backwards with fair precision to its net income. Micron's (MU) Kipp Bedard gave some remarkable guidance on those items in yesterday's Citibank conference:
Glen Yeung - CitiYeah. [What are (ed ElectricPhred)] your general thoughts on your new free cash flow profile and how you think that will play so far overtime?Kipp Bedard - Vice President, Investor RelationsYeah. If you just look at our fiscal Q3 that we reported in June, we were free cash flow over $400 million and we have talked about Elpida pre-capital at that $500 million to $550 million. They are run-in about $800 million in CapEx a year. So take that down by a couple of hundred millions. So, they are looking at $3 to $350 plus our $450, so I will say within that $700 to $800 range pretty easily with no market improvement needed to stay there.
Basically Kipp has just told us that Micron, and its new acquisition Elpida, will generate $2.8 billion to $3.2 billion per year in FCF (Free Cash Flow) after capital expenditures. Having this cash flow number, and statements on capital expenditures allow us to work backwards to net income. The net income can then be divided by the number of shares to get earnings per share to get to earnings per share.
The table, and notes following, do this calculation. Here's the back of my envelope:
| ($mm) | Notes: | |
| Free Cash Flow | 3,200 | 1 |
| Minus: | ||
| MU Depreciation | -1,805 | 2 |
| Elp Depreciation | -60 | 3 |
| Plus: | 4 | |
| MU Capex | 1,800 | |
| Elp Capex | 800 | |
| TOTAL APPROX NET INCOME | 3,935 | |
| Approx Shares out | 1,100 | 5 |
| Approx Earnings per share | $3.58 |
Notes:
- High end of Kipp's combined quarterly free cash flow guidance (quoted above) annualized.
- From company's 3Q 10Q as filed with the SEC. Nine month number of $1,354 divided by 3 to get quarterly, multiplied by 4 for annual.
- low end of depreciation guidance from analyst day.
- Cap Ex discussion from 9/3 Citi conference
5. 1.1 billion shares outstanding assumes partial repurchase of converts and partial conversion of converts.
What's Missing? Clearly the back of the envelope above doesn't deal with taxes, interest and other items on which we've been given little or no guidance.
Conclusion. It's a real shocker that management hasn't provided a pro-forma with numbers more recent than a full year ago. It's a shocker the analyst community and institutional investors haven't demanded it. It's a shocker the SEC hasn't required it. The company has done a pro forma before without an appraisal or audited numbers, so it could have updated the pro-forma after the Elpida closing. As my other articles have pointed out, our competitors, employees, and suppliers doubtless know pretty well what these numbers are. Its only the shareholders who are kept in the dark.
Despite a failing grade in investor relations and a CFO who has proved his mettle with the company's disastrous currency hedges (now finally behind us), I am delighted with implicit guidance of over $3.50 per share. There's very little risk on the $3.58 per share if Kipp's guidance is right on the Free Cash Flow, and my simple math is correct. I actually think that process shrinks, and line conversion from DRAM to NAND, and rationalizing Elpida's and Micron's production and test will drive this number considerably higher.
And don't forget, that's just on a continuing basis. As RJackson29, in his comments, and Russ Fischer, in his articles and comments, have pointed out here on Seeking Alpha, the one time purchase accounting pickup to be reported this quarter could generate an additional $3 per share.
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