How Is Micron Technology Like the Airline Industry?

This memory manufacturer is posting strong gains as it benefits from similar factors that fueled the airline rally.

Jun 10, 2014 at 5:45PM

At first, it would seem absurd to compare Micron Technology (NASDAQ:MU), a memory maker in the technology sector, to the airline industry. But this comparison has more in common than the industries' lack of similarities implies, and with airline stocks among the biggest gainers in 2013, examining these similarities is at least worth a look.

Troubled pasts
Neither airlines nor memory makers have much of a long-term record with investors in terms of capital preservation. While airlines are well known for a history of labor tensions, economic risk, and oil price exposure, memory manufacturers have gone through similar boom and bust cycles, sinking some manufacturers and causing turbulence for the entire industry.

Airlines and memory manufacturers have similar problems in that their products are commoditized, making conditions ripe for intense price competition. In the airline industry, this meant fare wars as carriers fought for market share, driving tickets into ranges where margins were thin or even negative. Memory manufacturers also overexpanded capacity similar to how airlines made too many seats available in each market. Following basic supply and demand laws, its pretty clear why this model ended badly.

For airlines, these pressures meant bankruptcy, with United Airlines, now part of United Continental Holdings (NYSE:UAL), declaring bankruptcy in 2002 and Delta Air Lines (NYSE:DAL) seeking protection in 2005. While both of these airlines survived bankruptcy, aviation history is full of carriers that were liquidated after becoming insolvent, and shareholders were wiped out in both these cases.

Although Micron Technology is a survivor in the memory industry, even this company has undergone extreme volatility. Shares of the memory maker shot from the $10 level to over $40 in 1995, only to be back in the single digits by mid-1996. The dot-com bubble was another boom and bust for Micron, as shares started below $20, spiked above $80, and fell back below the $20 level by 2002.

Consolidation control
For airlines and memory makers, all-out price wars are looking to become less likely as the number of competitors is reduced. Today's airlines are combinations of former competing carriers, with United Continental being the merger of United Airlines and Continental Airlines, Delta Air Lines being the merger of Delta Air Lines and Northwest Airlines, and American Airlines Group (NASDAQ:AAL) being the combination of American Airlines, US Airways, America West Airlines, and some of the TWA remnants.

Micron's portion of the memory industry is also now more limited in competition. Helping to increase consolidation efforts, Micron acquired bankrupt Japanese memory maker Elpida in a transaction that both boosted Micron's total capacity and removed a competitor from the field.

When only a few competitors remain, each competitor has a higher degree of pricing control and, already having a sizable market share, may be less likely to engage in scorched-earth price wars to increase market share. This oligopolistic setup is highly beneficial to shareholders, since greater pricing control brings more stable prices and less volatile earnings. Although company officials are not allowed to fix prices, oligopolistic industries do give greater flexibility in raising prices and keeping supply at reasonable levels, since fewer competitors need to get on board for the actions to be effective and not just result in market share loss.

Valuation, skepticism, and risks
Despite runs of over 200% in the past couple of years, shares of airlines and Micron continue to have low valuations when looked at alone or in relation to the broader market. Per estimates from Yahoo! Finance, Micron trades at under 10 times estimated 2014 earnings -- a good value on its own, and even better when looked at in comparison with the market as a whole.

Some airlines carry even lower valuations, with American Airlines Group and United Continental trading at 6.9 times and 8.7 times estimated 2014 earnings, respectively. Delta Air Lines trades just under 12 times estimated 2014 earnings, reflecting the airline's debt reduction and capital return plan but still well below the market average.

So why are valuations so low in these oligopolistic industries? Part of the discount comes from increased risks that remain present at these companies, including the (much diminished) threat of a price war, the fact that their products still remain largely commoditized, and energy price risks for airlines.

However, both industries have ugly histories, keeping some investors away as they wait for further evidence of industry change and stability. Since the primary reason for greater earnings and stability comes from consolidation, a complete return to the old model would require the breakup of existing companies or significant penetration by new competitors in industries with high setup costs. While the risks mentioned earlier do remain and may keep these companies' valuations below market averages, shares do have a good chance of rising, as skepticism connected to old industry practices fades away and these investors consider buying shares.

Consolidation opportunity
Micron Technology surged higher in 2013, but based on its valuation, lingering investor skepticism, and a shift in how the industry competes, I believe there is more upside ahead as earnings grow and the company proves itself in more investors' minds.

I remain bullish on airlines for similar reasons (although I do like some airlines more than others), but I acknowledge that above average risks do remain in their industries because of the commoditization of their products and, in the case of airlines, exposure to energy prices. But for investors looking for low valuation stocks in today's market and are willing to accept some risk, Micron Technology, American Airlines Group, United Continental Holdings, and Delta Air Lines are definitely worth a look.

Are you ready for this $14.4 trillion revolution?
Have you ever dreamed of traveling back in time and telling your younger self to invest in Apple? Or to load up on Amazon.com at its IPO, and then just keep holding? We haven't mastered time travel, but there is a way to get out ahead of the next big thing. The secret is to find a small-cap "pure play" and then watch as the industry -- and your company -- enjoy those same explosive returns. Our team of equity analysts has identified one stock that's ready for stunning profits with the growth of a $14.4 trillion industry. You can't travel back in time, but you can set up your future. Click here for the whole story in our eye-opening report.

Alexander MacLennan owns shares of American Airlines Group and Delta Air Lines and has options on Mircon Technology, Delta Airlines, and American Airlines Group. The Motley Fool recommends and owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers