The Long and Short

Don’t throw the MU baby out with the bathwater

| May 13, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The route in the equity market has hit technology stocks hard, particularly semiconductors, due to pricing pressures, supply chain constraints and refinancing or rollover risk.  Credit spreads have moved wider for semiconductors, particularly ‘BBB’ semiconductors, through this flight-to-quality.  But one thing not necessarily getting focus is the strength of the balance sheet for some of these pressured semiconductor credits. MU is one such credit.

MU (Baa3/BBB- (p)/BBB) remains in a strong net cash position and has very healthy free cash flow generation. The company also benefits from not having any debt maturity walls, alleviating the need to tap the market in a rising rate environment. MU bonds have widened nearly 100 bp since the start of 2022 and are now yielding over 4.7% in the intermediate part of the curve.

Net Cash Position Large and Growing

MU’s strong balance sheet is underscored by the company’s growing net cash position.  MU ended the most recent quarter with $4.9 billion of net cash, which is up from $3.0 billion at fiscal year-end 2021 and $1.9 billion at fiscal year-end 2020.  Additionally, management noted that liquidity stood at $14.4 billion at the end of the quarter as the company had just over $11.8 billion of cash on hand and $2.6 billion in availability under its revolver.  Free cash flow in the quarter was just over $1.0 billion and is expected to be roughly $5.5 billion for the full fiscal year.  While the company is returning cash to shareholders via the dividend and buybacks, shareholder remuneration has not outpaced free cash flow generation, thereby growing cash on hand.  This strong cash position provides MU with great flexibility in a rising rate environment as it allows for the company to repay debt versus refinancing should rates become too high and/or the market remains volatile.  Furthermore, the company can successfully reinvest in the business to support further top line and margin growth.

Exhibit 1. MU Cash Flow and Capital Allocation

Source: Company Presentation; APS

On Pace to Post Record Full Year Results

Operating performance has been solid for MU despite higher raw material costs and supply chain issues. In the most recent quarter, MU posted strong double-digit revenue growth (above 30%) across all business units, except its Mobile unit, which witnessed 4% growth.  Furthermore, the same units that posted above 30% year-over-year growth also witnessed solid single-digit sequential growth.  In addition to strong top-line growth, MU posted very strong margin growth with gross and operating margins up roughly 15 percentage points year-over-year to 47.8% and 35.3%, respectively.  Management noted that second quarter results exceeded the high end of their guidance range for both revenues and margins, given the strong execution in the quarter.  Additionally, management noted that portfolio momentum is accelerating which bodes well for delivering record revenues and strong profitability for the full fiscal year.

Exhibit 2. MU Revenue Breakdown

Source: Company Presentation; APS

S&P Maintains a Positive Outlook

S&P revised its outlook to positive in June 2021 as the agency expects operating performance to continue to remain strong given the robust demand for memory products across most end markets.  Despite supply chain disruptions that caused management to provide a cautious outlook at the start of the fiscal year, MU has exceeded growth and profitability expectations.  Additionally S&P noted that they expect MU to continue to generate positive free cash flow through industry cycles.  MU’s Investment Grade ratings are underscored by the company’s strong balance sheet and net cash position.  They expect MU to maintain a net cash position even during industry troughs.  Shareholder rewards are expected to remain well within the confines of free cash flow and not anticipated to negatively impact the balance sheet.  Should capital spending need to increase for reinvestment purposes, shareholder rewards could be walked back to maintain the company’s strong cash position.

Meredith Contente
meredith.contente@santander.us
1 (646) 776-7753

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles