With the stock market at record highs, and Federal Reserve's Quantitative Easing program at an end, you might think investors would be starting to get nervous about stock valuations. But not everyone's nervous. Some seem downright ... excited!

Managers at corporations seem particularly happy to spend billions of dollars buying back their companies' own shares. For example, late last month, computer flash memory maker Micron Technology (NASDAQ:MU) announced plans to repurchase $1 billion worth of its own stock.

The announcement came just one month after Micron reported the close of a fiscal year that saw revenues grow dramatically, GAAP profits more than double, and cash profits increase fivefold over 2013 levels. That certainly sounds good and bolsters the case for buying back stock. But is this buyback plan as good as it sounds?

We attempt to answer that question ... by asking two more questions.

Can it pay?
With $4.5 billion in cash and equivalents, and a further $1.8 billion in longer-term investments, Micron has enough cash available to implement its entire $1 billion-strong buyback tomorrow, if it were of a mind to. What's more, with only $4.4 billion in long-term debt, Micron's stock shows a net-cash position on its balance sheet, such that rapidly implementing the buyback would not unduly affect the company's liquidity.

And it gets better. S&P Capital IQ data confirm that, over the past year, Micron generated more than $3 billion in positive free cash flow from its business. That was enough cash to back up 99.9% of the company's reported GAAP earnings. (That's something not all companies can say). So in theory, at least, Micron doesn't even need to dip into its savings to pay for its buyback. At its current pace of cash production, Micron can afford to buy back $1 billion in stock, and then $1 billion more after that ... and then $1 billion more after that. Every year.

Should it pay?
Granted, not all years are so kind to Micron stock as the past 12 months have been. Indeed, S&P Capital IQ data show that 2014 was the best year for cash production at Micron of any year out of the past five. Over that time span, the company has four times failed to generate even $1 billion in positive free cash flow -- and in one year, 2011, free cash flow actually ran negative.

So what we really need to ask is, now that Micron is flush with cash, is its stock cheap enough that it should be using that cash to buy back stock? And the answer to that question depends on whether the stock is cheap.

So here's how Micron stock currently compares with a couple of its bigger rivals.

Stock

P/E

Dividend Yield

5-Year Projected Growth Rate

Total Return Ratio

Micron

13.0

-

15%

0.9

SanDisk (NASDAQ:SNDK)

19.3

1.3%

17.8%

1.0

Western Digital (NASDAQ:WDC)

15.3

1.6%

6.7%

1.8

Peer comparisons from finviz.com.

From the perspective of a pure value investor -- one who agrees with master investor John Neff that you get your best values from buying companies whose P/E is no greater than the total return from a stock's earnings growth and dividend payouts -- Micron does indeed look like a nice bargain. Valued on P/E, Micron stock is significantly cheaper than SanDisk, despite growing nearly as quickly. And it's expected to generate a much better total return than is Western Digital, whose business actually leans more toward hard drives, but which is a player in flash as well.

Yet Micron stock carries a lower P/E than Western Digital does as well.

The upshot for investors
You might find it surprising to hear a value investor say that, despite having run up 80% over the past year, Micron is still a bargain today. But that's what the numbers tell me. So long as the growth estimates prove accurate, the company's strong earnings and just-as-strong free cash flow, combined with a rock-solid balance sheet, make Micron the stock to beat.

 

Fool contributor Rich Smith does not own, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 289 out of more than 180,000 members.

The Motley Fool owns shares of Western Digital. 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.