Homebuilders & Semiconductors As Lending Standards Tighten Along With Financial Conditions

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Micron Technology -- Cyclicality of Memory Chips

As analysts have cut free cash flow margin estimates to -21.2% for 2023 before recovering to 6.5% in 2024 (vs. 10.1% in 2022), Micron’s MU stock has taken it on the chin. Amidst the consolidation in the memory semiconductor space, more compute-intensive AI models, and overall digitization of the economy, Micron’s DRAM and NAND products should continue to gain traction in a more consolidated industry. Since memory chips don’t represent the ultra high-end of chips, Chinese semiconductor firms are set to compete with Micron. Recently, DRAM and NAND pricing has gotten under pressure as customers work through inventory. The memory chip industry is set to grow by 17%/year between 2021 – 2027 as AI models require more computing, memory, and storage. As a more capital-intensive chips company, Micron’s plan to invest $150bn globally by 2030 is of concern despite recently cutting capital expenditure guidance for 2023 to $7bn - $7.5bn.

American Express - The High-End Credit Card Business

As the world’s premium credit card company, American Express’ AXP business moat is undeniable. While the world has 5 billion credit cards, only 100 million are from Amex, showing that the company focused on a high-spend, high-retention customer in the upper percentiles of earners. At an NTM P/E of 14.6, the company trades below Visa’s NTM P/E multiple of 25.7x and Mastercard’s at 29x. While investors had doubts about the increase of the annual fee on the Amex Platinum from $550 to $695/year in 2021, customer perception has been extraordinarily positive. With GenZ and Millennials as new growth engines (accounting for 75% of new members in 2022), the company’s well positioned to expand its net income margin from the current 14.8% (down from 16.9% in 2019).

Lennar - Suburbanization On The East & West Coast

The homebuilder industry has been chronically underbuilding single-family homes since the GFC, coupled with existing home inventory on a declining path as a result of having locked in low 30-year fixed mortgage rates, a move from cities into suburban areas, the great migration, and America’s demographics should support demand for years to come. The average age of the US home went from ~29 years in 1995 to 42 years today (according to Moody’s). Existing home inventory units have declined significantly from close to 2 million in 2012 to 667k homes today. The chronic shortage comes when banks tighten lending standards to the real estate sector, likely prolonging the current cycle. Lennar’s LEN main markets are the east and west coast, meaning Millennials that move from cities to suburban areas will end up buying homes built by Lennar.

Blue Line Capital maintains a long position in Micron, but no position in American Express and Lennar. Positions are subject to change without further notice.