Why Greenlight Capital bought Micron Technology shares in 4Q 2013
Greenlight Capital opens a position in Micron Technology
David Einhorn’s Greenlight Capital said in its fourth quarter letter to investors that the fund has incorporated several long ideas to the portfolio, including a large position in Micron Technology (MU) and medium-sized positions in BP plc (BP) and Anadarko Petroleum (APC). The exact size of the positions wasn’t disclosed. Anadarko and BP stocks saw slight gains after the fund disclosed the positions.
The letter said Greenlight Capital funds returned 6.5% net of fees and expenses in the fourth quarter of 2013, bringing the full-year net return to 19.1%. Since its inception in May 1996, Greenlight Capital has returned 2,211% cumulatively or 19.5% annualized, both net of fees and expenses.
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Micron Technology (MU) is a 6.7% position when added to Greenlight’s old 3Q portfolio based on a 13F disclosure on November 25 last year. According to the letter from Greenlight, the fund established a position in MU at an average price of $16.49, marking the first time Greenlight has taken a long position in a company in which it once had a material short position. The letter added that the fund had a large short position in MU from January 2001 to February 2005, but “back then, DRAM was a lousy industry with too many competitors selling an undifferentiated product, often below cost.”
The letter further said,
- “The industry has changed and so has MU. Its purchase of Elpida Memory out of bankruptcy in August 2013 marks the end of a decade of consolidation from roughly a dozen major DRAM players down to just three. Technological advances and locked-up intellectual property have made it unlikely that any new players will enter the industry in the intermediate term.”
Greenlight also explained,
- “MU and its competitors have signaled that they will refrain from adding capacity and will instead prioritize economic value-add. For the first time in memory, MU intends to use its excess cash flow to shrink the outstanding share count rather than build new factories. We believe the company will approach $4 per share of earnings and free cash flow in calendar 2014, and should enjoy a better multiple as investors begin to appreciate the new dynamic. The shares ended the quarter at $21.75.”
Micron saw its shares rally after it reported its 1Q 2014 results earlier this month. Revenues increased 120%, to $4.04 billion, while non-GAAP earnings jumped 165% higher, to $0.77 per share above analyst estimates. Fiscal Q1 was Micron’s first full quarter with combined Micron and Elpida financials. Revenues from sales of DRAM products were 69% higher, primarily due to an increase in sales volume resulting from the acquisition of Elpida and also because of opportunistic shifts to a higher mix of wafer sales in both PC and mobile markets, which generated above-average gross margins despite below-average selling prices. Revenues from NAND Flash products sales were 8% higher, with an 11% volume increase. This offsett a slight ASP decline. Micron’s total NAND supply growth was below the industry level in 2013, but it’s expected to rise slightly above the industry in 2014, given the DRAM-to-NAND conversion. This supply forecast compares to the five-year NAND bit demand CAGR in the low-to-mid 40% range, implying a favorable long-term supply and demand balance.
Micron saw free cash flow of $838 million, an increase over the 4Q level of $385 million and opposed to 2012’s level of -$302 million. Contributing to the cash flow increase was a gross margin rise to 32% from 25% in 4Q 2013 and 12% a year ago. A fire in September at Korean DRAM maker SK Hynix’s Wuxi plant in China resulted in significant reductions in inventory across the DRAM supply chain—particularly for the PC and mobile segments. The company believes that this tight and further declining inventory situation coupled with balanced long-term production and demand will continue to drive healthy market conditions.
For more information on Greenlight and its 3Q 2013 positions, see this Market Realist report.