For the first time, cyclical stock Micron Technology (MU) announced a $10 billion buyback program in fiscal 2018. A stock buyback program generally happens for a profitable company with stable cash flow, like Qualcomm (QCOM) and Intel (INTC). A stock buyback program from a cyclical company like Micron, which enjoys strong cash flows during cyclical upturns and suffers from negative cash flow during downturns, comes with its own risks and rewards.
The current bearish environment on Micron presents the company’s management with an opportunity to buy back as much as 20% of the outstanding shares from the $10 billion budget and improve its EPS by ~25%. If a company reduces the share count, the earnings would be divided among fewer shares, increasing EPS. However, for a cyclical stock like Micron, a buyback could have a compounding impact on both profits and losses.
Micron’s buyback—the bear case
Bears expect Micron’s earnings to fall as the company is hit by the cyclical downturn. If the company’s EPS fall to zero, a share buyback makes no sense since there would be no EPS accretion. In the worst-case scenario, if the company reports negative EPS, the buyback would compound the losses with each share bearing a larger loss due to reduced share count.
To a bear, Micron is better off keeping the cash in the balance sheet or paying off a one-time hefty dividend to shareholders instead of spending it on buybacks.
Micron’s buyback—the bull case
A bull expects Micron’s earnings to revive in the long term as memory prices stabilize. The company can buy back more shares from its current budget, thereby lowering the share count significantly. Once it returns to positive cash flow, the EPS accretion will compound.
Micron is a risky investment, but this risk comes with its own compounded rewards. If investors are bullish on Micron’s long-term growth prospects, they should keep a watch on the stock price and buy when the stock bottoms out.
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