Which Is the Better Buy: SanDisk or Micron Technology?

Both companies' shares are flying high. Which one should investors buy?

May 15, 2014 at 4:00PM

Shares of Micron Technology (NASDAQ:MU) hit a new 52-week high earlier this week. The company's peer, SanDisk (NASDAQ:SNDK), is trading at a similarly unseen price this week. Despite the high price tags, both companies offer investors a great opportunity to get in on the rapidly growing NAND flash memory market, which is why the market is bidding up these stock prices.

Investors trying to choose between SanDisk and Micron Technology face a tough decision. Which is the better buy, SanDisk or Micron?

Why these companies are worth a look
On Micron's second-quarter conference call, CEO Mark Durcan expressed the company's expectations that the NAND industry will grow in the low-40% range for 2014. Over the next five years, the company expects the market to grow at a rate in the high-30% to low-40% range.

Durcan goes on to note that industry capacity can cause volatility in the market. Determining proper capacity is often difficult for companies as they try to match long-term outlooks with short-term demand.

Most recently, a fire at SK Hynix's Wuxi facilities put a damper on the company's production levels. While the company expects to return to its pre-fire production levels this quarter, stagnated NAND capacity at SK is good for both SanDisk and Micron.

Micron, meanwhile, increased its NAND capacity by converting its Singapore facility from DRAM to NAND. SanDisk, too, is steadily investing in increasing capacity. Capital expenditures at the latter company, however, are decreasing.

Let's look at some numbers

 

SanDisk

Micron

Revenue (ttm)

$6.34 billion

$13.31 billion

Gross Margin (ttm)

48.7%

29.7%

Net Income (ttm)

$1.15 billion

$2.84 billion

Free Cash Flow (ttm)

$1.57 billion

$2.72 billion

Forward EPS

$6.50

$3.04

Forward PE

14.0

9.0

Price-to-sales (ttm)

3.26

2.22

Price-to-FCF (ttm)

13.7

11.6

Source: Yahoo! Finance

Micron looks like a better buy than SanDisk. It's converting revenue into cash more efficiently, and it's priced more attractively in terms of future earnings, sales, and free cash flow. However, SanDisk does have one advantage -- it's growing faster than Micron. Over the next five years, analysts expect SanDisk to grow earnings at a rate of 18.75%. Comparatively, they expect Micron to grow earnings at a rate of just 10.25%.

As a result, SanDisk offers a slightly more attractive PEG ratio of 0.75 compared to Micron's PEG of 0.84. With both stocks trading below PEG ratios of 1, it's a strong indication the market is undervaluing the potential growth of both company's earnings.

SanDisk's significantly higher gross margin is worth investigating as well. The company posted record gross margin levels for the first quarter with 51% margin on its sales. Management attributed the boost to stronger SSD product mix.

Comparatively, Micron achieved a gross margin of 34% last quarter, and trade NAND was actually a drag on its overall margins. This is an indication that SanDisk's technology may have more of a moat around it, as the company is better able to control the decline in price per gigabyte. Of course, part of SanDisk's focus in the recent past has been the high-end NAND market, so the fact that it has higher gross margins shouldn't be surprising.

The better buy
Although both stocks are worth owning, Micron seems to offer better value for the price right now. For those particularly interested in strong growth, SanDisk presents its advantages, but it's a bit more risky at this price, and doesn't quite offer the value of Micron.

With Micron, investors gain the advantage of diversifying into the DRAM market, an equally impressive growth story. Micron expects the DRAM industry to grow in the 20%-30% range annually over the next five years. As part of two growing industries, and priced where it is, Micron looks like the better buy.

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Adam Levy has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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