Upgrades: 3 Facts You Must Know About Micron Technology's Big Boost

With the stock down 5% over the past two weeks, Goldman Sachs may have been early in recommending Micron Technology (MU 3.06%) shares two weeks ago -- but that doesn't mean Goldman was wrong. Indeed, more and analysts are starting to agree with Goldman Sachs: Micron stock has bottomed.

The news
On Tuesday, investment banker Mizuho Securities clambered aboard the Micron bandwagon. According to StreetInsider.com, Mizuho has just upgraded Micron shares to "buy," and says the shares that cost just $10 and change today are really worth closer to $12.

But is Mizuho right? Here are three facts you need to know to decide.

Fact 1: Micron costs less than its book value
Key to Mizuho's buy thesis for Micron is the fact that Micron shares currently cost just 0.8 times the book value of the stock. (Currently, data from S&P Global Market Intelligence put the valuation at closer to 0.9 times book value of $11.89 per share -- but this is after the stock jumped in price in reaction to Mizuho's upgrade.)

In any case, Mizuho says this is close to a "trough valuation" for the stock. What's more, the stock could look even cheaper once it has absorbed Inotera. With its erstwhile rival's assets incorporated into it, Micron's book value could rise by another $2 to $3, says Mizuho.

That could put Micron's book value close to $15. At which point, even if investors continue to value Micron at only 0.8 times book, the stock should be worth $12. A price closer to Western Digital's (WDC 4.28%) 1-times-book-valuation, on the other hand, would imply a price of $15 for Micron stock. And if investors were ever to price Micron closer to the 2.4 times book value at SanDisk (NASDAQ: SNDK), or the 4.9 times book value at Seagate (STX) -- Micron stock could soar.

Fact 2: There's a reason why Micron shares might go up
What would it take to convince investors to pay so much more for Micron than they're willing to pay today? One possibility would be a buyout. Part of the reason that SanDisk shares cost so much, relative to their book value, is that Western Digital agreed to pay a big premium to buy SanDisk. At a market capitalization of less than $11 billion, Micron currently costs less than SanDisk, so a buyout doesn't seem out of the realm of possibility.

But even absent a takeover, Mizuho sees thinks Micron could grow just fine on its own. According to the analyst, gross margins on DRAM memory appear to be improving -- and DRAM sales make up nearly 60% of Micron's business.

Fact 3: Mizuho's not alone
Mizuho isn't the only analyst singing Micron's praises today, either. Simultaneous with Mizuho's upgrade, Susquehanna Securities (which already had a positive rating on Micron stock) announced that although 2016 could continue to be tough for Micron, it sees a "strong rebound" in Micron's share price in 2017.

According to Susquehanna, "unit economics" could begin improving toward the second half of this year, with gross margins improving in both Micron's DRAM and NAND memory businesses. Valuing the stock roughly at the same level as Western Digital's 1 times book value, Susquehanna predicts a $15 share price for Micron.

And one more fact...
All that being said, and as positive as these three analysts -- Goldman, Susquehanna, and now Mizuho, too -- are about the stock, there's still one more fact you need to consider before acting on today's upgrade:

The analyst making the upgrade today is not good. In fact, it's kind of horrible.

According to our data here at Motley Fool CAPS, where we've been tracking Mizuho's performance as an analyst for more than four years now, Mizuho Securities ranks in the bottom 20% of investors we track. Over the past four-plus years, fewer than 34% of Mizuho's stock recommendations have succeeded in outperforming the S&P 500 -- and on average, Mizuho's picks are underperforming the stock market by more than 13 percentage points per pick.

What's more, when it comes to picking semiconductor stocks, Mizuho does even worse:

None of which has me feeling particularly enthusiastic about Mizuho's endorsement of Micron Technology stock today.

A better way to make money
Granted, Micron has the lowest P/B ratio of any of the memory-makers we've covered so far -- Micron, Seagate, Western Digital, and Western D's new prize, SanDisk. Granted, too, Micron's sub-6 valuation gives it the lowest P/E ratio of any stock on this list.

But Micron also generates less free cash flow than any other stock on this list. Indeed, Global Market Intelligence puts Micron's FCF number at just $394 million -- a mere fraction of the $2.1 billion that Micron reported as its net income for the past 12 months. And according to Susquehanna's note today, Micron will probably need to up its capital spending as high as $5.3 billion to $5.8 billion this year, driving its free cash flow into negative territory.

If you ask me, that prospect is likely to keep a lid on Micron shares at least through the balance of this year. I'm much more optimistic about the prospects for Seagate stock (trading at just 8.3 times free cash flow) or Western Digital, which costs less than 6 times FCF. Not only do those two offer better valuations than Micron does -- they also pay solid dividend yields...which Micron does not.

Long story short: If you're going to be waiting around a year for the memory market to recover, you might as well get paid a dividend while you wait. Seagate and Western Digital will pay you that dividend.

Micron won't.