Micron Technology (NYSE:MU) - Consistent Wealth Destroyer

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The Applied Finance Group’s (AFG’s) research and suite of investment tools help investors to easily understand a company’s true economic profitability, as well as if the company’s asset management policy is suitable to maximize that profitability. AFG’s Wealth Creation Report (WCR) allows you to visually analyze a company’s historical Economic Margin (EM) level, current EM and expected change in EM based on projections built out by AFG’s default valuation model, which takes into account the total cash flow a company delivers. A company that earns above its cost of capital (positive Economic Margins) and is growing its asset base is considered to be following a wealth-creating strategy. Back-tests have proven these companies to be more likely to outperform those companies following a wealth-destroying strategy (negative Economic Margins and growing assets).

Avoiding firms with management teams who try to grow a negative profitability business has helped our clients since 1996 avoid potential torpedoes in the market. AFG believes that if a firm is not profitable, it needs to divest losers and focus on its core competencies to get its profitability levels back on track and earn the right to grow, rather than throw more money at a losing business. After getting an understanding of how profitable a firm is and which direction the firm’s profitability is headed, investors must then understand how much a company is growing out its assets to take advantage of its current profitability or what to divest in order to fix its profitability.

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Beyond having positive Economic Margins (EMs) and growing assets, investors want to see a company improve its EMs at a greater rate than its sector peers, as these companies have also proven to be more likely to outperform than companies with declining EMs.

Below is an example of Micron Technology (NYSE:MU), a company AFG considers to be a consistent wealth destroyer, identified by using AFG’s Wealth Creation Report.

Just because a company has historically been a consistent wealth creator/destroyer does not necessarily mean the company will continue this pattern nor does it mean that the company currently looks unattractive from a valuation perspective. Over the past two years, Micron Technology has divested parts of its business, which may have been a good thing as its EMs are projected to improve in the upcoming year. However, the company currently looks to be overvalued according to AFG’s valuation model. To see how MU rates as far as overall investment attractiveness view the chart below.

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AFG's Wealth Creation Report is a 3part chart:

The first chart is a summary of a company’s economic performance over time, as well as insight into how analyst EPS forecasts project AFG’s default EMs over the next two years.

• EM – Productive Capital = (Cash Flow minus Capital Charge excluding Intangibles) divided by the Inflation Adjusted Productive Capital.

• EM – Invested Capital = (Cash Flow minus Capital Charge including Intangibles) divided the by Inflation Adjusted Productive Capital.

•Val Score = Ranked Percent To Target for the current calendar yr. where 100 is the most undervalued and 0 is the most overvalued (ranked across all firms in database with forecasts for 4,000 firms).

• EM Chg = One year out forecast EM minus last reported fiscal year's EM. Invested Capital EM is used.

The second part of the chart is the Asset Growth chart allows additional insight not only the growth of a company, but how that company’s growth strategy has affected their economic performance.

• Assets – Steady Growth (1 Yr) = The real growth rate at which a firm can increase its capital base given internally generated cash, while maintaining a constant capital structure.

• Assets – Actual Growth (1 Yr) = Real year over year change in Inflation Adjusted Invested Capital achieved by the firm. Note: All actual growth is “actual”, i.e. 2007 growth represents growth from most recent quarterly balance sheet.

This data can then be used to identify how the stock has performed in relation to the market place.

• Return Net Market = The company's cumulative total return relative to the cumulative market-weighted average total return of the largest 2000 companies for the equivalent time period.

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