Is Micron Technology the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Micron Technology (Nasdaq: MU  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Micron.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 11.7% Fail
  1-year revenue growth > 12% 76.6% Pass
Margins Gross margin > 35% 32.0% Fail
  Net margin > 15% 21.8% Pass
Balance sheet Debt to equity < 50% 29.4% Pass
  Current ratio > 1.3 2.34 Pass
Opportunities Return on equity > 15% 28.5% Pass
Valuation Normalized P/E < 20 8.89 Pass
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
       
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

Micron weighs in with a respectable score of six. The maker of memory chips has come a long way from its darkest hours in recent years.

For a long time, Micron was engaged in a cutthroat price war with rivals SanDisk (Nasdaq: SNDK  ) , Samsung, and a host of other memory makers. But with rising consumer demand for products like Apple's (Nasdaq: AAPL  ) iPhone, which uses Micron chips, that price war has come to an end.

Now, things are looking up for the chip maker. Earlier this year, it bought Numonyx, which combined former memory chip operations of Intel (Nasdaq: INTC  ) and STMicroelectronics (NYSE: STM  ) . Even with prices for tech gadgets ever on the decline, Micron is poised to take advantage of growth in "flash memory" for new tablets like the iPad to boost sales.

With a low valuation, Micron shares look attractive. Margins aren't likely to get much better than this for what's been seen in the past as a commodity business, and obviously, 76% revenue growth can't last for long. But as a value play on continuing strength in technological innovation, Micron is worth considering.

Keep searching

No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Micron Technology to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool Options has recommended buying calls on Intel, which is a Motley Fool Inside Value pick. The Fool owns shares of and has bought calls on Intel. The Fool owns shares of Apple, which is a Motley Fool Stock Advisor recommendation. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 02, 2010, at 4:16 PM, russfischer1013 wrote:

    There is the little problem of the pending lawsuits with Rambus.

    I'm betting they are resolved in Micron's favor and the stock will double...or much more. If not the stock will likely go t $4.

    Roll the dice.

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