Has Micron Technology Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Micron Technology (NASDAQ: MU  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Technology.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

7.7%

Fail

 

1-year revenue growth > 12%

(6.3%)

Fail

Margins

Gross margin > 35%

11.8%

Fail

 

Net margin > 15%

(12.5%)

Fail

Balance sheet

Debt to equity < 50%

38.8%

Pass

 

Current ratio > 1.3

2.57

Pass

Opportunities

Return on equity > 15%

(11.3%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

2 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at Micron Technology last year, the company hasn't been able to gain back any of the four points it lost from 2010 to 2011. Even worse, Micron has gone from being profitable to losing money, which is a big part of the reason why its shares have been flat over the past year.

Micron makes memory chips for a variety of purposes. With solid-state storage options gaining in popularity versus slower conventional hard disk drives, Micron has found new ways to market memory, both with its own drives and by providing chips for STEC (NASDAQ: STEC  ) and other third-party drive makers.

For years, Micron suffered through supply gluts that forced it into costly price wars. But more recently, conditions in the market have improved somewhat. Tight supplies of NAND flash chips mean higher prices for OCZ Technology (NASDAQ: OCZ  ) to produce solid-state drives, but they also mean more revenue for Micron and rival SanDisk (NASDAQ: SNDK  ) in supplying those chips.

Despite lackluster results in its most recent quarter, Micron's proposed deal to acquire bankrupt memory-chip manufacturer Elpida could give the company a nice boost. Elpida has ties to Apple's (NASDAQ: AAPL  ) iPhone and iPad lines, so gaining Apple as a customer would definitely have an impact on Micron if it succeeds in acquiring Elpida.

For Micron to improve, it really needs to find new opportunities for growth in what has become a very competitive commodity business. If the Elpida acquisition fosters movement in the right direction, Micron could finally start getting closer to perfection in the long run.

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.

Micron is just one of the many companies trying to ride Apple's coattails, so if you own Micron, you should also know what's up with Apple. Right now, there's a big debate raging as to whether Apple remains a buy after its monster run-up in recent years. Motley Fool senior technology analyst and managing bureau chief Eric Bleeker wants to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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


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