Micron (MU) is a semiconductor company that is a member of the S&P 500 index. It is one of the companies with a low PEG (price-to-earnings-to-growth) ratio, and thus one of the stocks Peter Lynch may have invested in.

Company Overview           

Micron, which was founded in 1978, and which is headquartered in Boise, ID, is a memory chip producer. The semiconductor player produces DRAM and NAND chips, which are used in most tech products, from smartphones to automobiles.

During the most recent quarter (fiscal Q4) Micron grew its revenues by 38% year over year, to $8.4 billion. Micron also recorded very strong earnings growth, as the company’s earnings per share rose to $3.53, an increase of 75% year over year.

Growth Prospects       

The semiconductor industry as a whole has been relatively cyclical in the past. This is also true for the memory chip segment. There are, however, several reasons why Micron’s growth might be more consistent in the future. The memory chip industry has consolidated a lot over the last couple of years, and right now there are only 3 relevant players left – Micron, Samsung, and SK Hynix. Oligopolies such as this one are usually a positive for the margins that its members can generate.

Demand for Micron’s products is also poised to grow substantially over the coming years, due to trends such as the Internet of Things, cloud computing, video gaming, and even autonomous driving. All these technologies require that a high amount of data is recorded, processed, stored and moved. Memory chip suppliers such as Micron will benefit from that, as demand for DRAM as well as for NAND chips will rise through the coming years and decades.

Valuation, Shareholder Payouts, And Expected Returns

Micron has produced net earnings of $11.95 per share over the last four quarters. This was a massive increase of 140% year over year. Based on a share price of $45 Micron is currently valued at 3.8 times trailing earnings. Its PEG ratio (the P/E ratio divided by the annual earnings growth rate) is absurdly low, at just 0.03.

Micron will not be able to sustain an earnings growth rate of 140%, obviously, but due to the very low valuation, even a substantially lower earnings growth rate could lead to outsized total returns.

Micron does not pay any dividends, which could be a reason not to buy this stock for some investors. Micron has, however, decided to pay out cash to its owners via share repurchases. The company has announced a $10 billion buyback program earlier this year, which is enough to buy back ~19% of its stock (at current prices). This alone would allow for earnings per share growth of 23%, all else equal.

When we conservatively assume that Micron will be able to grow its earnings per share by just 5% a year going forward, its PEG ratio still is very low (~0.8), and total returns could be very high if the PE ratio expands to a somewhat higher (yet still low) multiple of 7 over the coming five years. In that scenario, multiple expansion would produce a 13% annual tailwind, and total returns would be 18%, even without dividend payments.

Final Thoughts

Micron is active in a cyclical industry, but it looks like the cyclicality could decrease going forward, due to long-term demand drivers such as the IoT, and due to a better-functioning oligopoly.

Micron should be able to deliver attractive total returns over the coming years, through a combination of multiple expansion and earnings per share growth (which will be positively impacted by Micron’s buybacks).