Microchip Down to Underperform

Zacks

We recently downgraded our recommendation on chipmaker Microchip Technology Incorporated (MCHP) to Underperform from Neutral, following dismal results for the second quarter of fiscal 2013 and disappointing guidance.
 
Earlier in the month, Microchip reported its second quarter 2013 results, which missed the Zacks Consensus Estimate and represented the second consecutive quarter of estimate miss.
 
Sales continued its downward trend, hurt by weak European markets and uncertain economic environment in the U.S. and China. Margins were also hit by increased acquisition charges.
 
Consequently, all the seven analysts covering the stock reduced their estimates for 2013, leading to a significant decline in earnings estimates.
 
Similarly, for 2014, all the six analysts covering the stock reduced their estimates causing a steep decline in estimates. 
 
We do not foresee a significant improvement in business in the near term. The company’s guidance was also weak. The weak economic environment coupled with deceleration in worldwide GDP growth continues to plague Microchip. All the three product lines of Microchip – microcontroller, analog and memory along with Standard Microsystems business – are projected to be soft.  
 
In addition, high level of inventory also remains a matter of concern. Microchip is reducing wafer starts in the fabs and putting fab personnel on a rotating time-off schedule in order to reduce costs and maintain staff to ramp up production as and when required. This process is expected to impact gross margins till June 2013, by which time management expects to see end of inventory correction and recovery in business.  
 
We are also skeptical about the company achieving the targeted synergies from the recent Standard Microsystems acquisition as the weak economic environment continues to adversely impact the business of Standard Microsystems. 
 
Although Microchip Technology, which competed with the likes of Atmel Corporation (ATML), is one of the fastest growing providers of 16-bit and 32-bit microcontrollers and has one of the highest dividend yields in the industry, the current economic scenario compels us to have a negative stance on the company. 
 
Our Underperform recommendation is supported by a Zacks #5 Rank, which translates into a short-term rating of Strong Sell. 
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