Micron Technology, Inc. (NASDAQ:MU) and Oclaro, Inc. (NASDAQ:OCLR) are the two most active stocks in the Semiconductor- Memory Chips industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. Micron Technology, Inc. (MU) has an EBITDA margin of 19.65%, compared to an EBITDA margin of 23.19% for Oclaro, Inc. (OCLR). This suggests that OCLR underlying business is more profitable. MU’s ROI is 19.30% while OCLR has a ROI of 27.80%. The interpretation is that OCLR’s business generates a higher return on investment than MU’s.
Cash is king when it comes to investing. MU’s free cash flow (“FCF”) per share for the trailing twelve months was +1.20. Comparatively, OCLR’s free cash flow per share was +0.02. On a percent-of-sales basis, MU’s free cash flow was 6.53% while OCLR converted 0% of its revenues into cash flow. This means that, for a given level of sales, MU is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios measure a company’s ability to meet short-term obligations and longer-term debts. MU has a current ratio of 2.30 compared to 3.90 for OCLR. This means that OCLR can more easily cover its most immediate liabilities over the next twelve months. MU’s debt-to-equity ratio is 0.60 versus a D/E of 0.01 for OCLR. MU is therefore the more solvent of the two companies, and has lower financial risk.
MU trades at a forward P/E of 6.00, a P/B of 2.35, and a P/S of 2.08, compared to a forward P/E of 10.46, a P/B of 2.81, and a P/S of 2.45 for OCLR. MU is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. MU is currently priced at a -19.62% to its one-year price target of $48.98. Comparatively, OCLR is -31.32% relative to its price target of $12.58. This suggests that OCLR is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.80 for MU and 1.70 for OCLR, which implies that analysts are more bullish on the outlook for MU.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. MU has a beta of 1.79 and OCLR’s beta is 1.61. OCLR’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. MU has a short ratio of 1.73 compared to a short interest of 6.74 for OCLR. This implies that the market is currently less bearish on the outlook for MU.
Oclaro, Inc. (NASDAQ:OCLR) beats Micron Technology, Inc. (NASDAQ:MU) on a total of 7 of the 13 factors compared between the two stocks. OCLR has higher cash flow per share, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, MU is the cheaper of the two stocks on an earnings, book value and sales basis, OCLR is more undervalued relative to its price target. Finally, TER has better sentiment signals based on short interest.