Here's Why You Should Make Position in Microchip (MCHP) Now
Microchip Technology Inc. MCHP is benefiting from increasing demand for its microcontrollers. A robust portfolio driven by new product launches is helping the company expand customer base. These factors are driving top-line growth, improving operating efficiency and boosting profitability.
Notably, Microchip has outperformed the Zacks Consensus Estimate in all of the trailing four quarters with an average positive surprise of 9.26%. Revenues also beat the Zacks Consensus Estimate in three of the trailing four quarters.
The Zacks Consensus Estimates for 2017 and 2018 earnings have increased significantly in the last 30 days, on the back of strong prospects.
Recently, Microchip reiterated third-quarter fiscal 2018 guidance. The company expects net sales in the range of $971.7-$1,012.1 million, flat to down 4% on a sequential basis but up 12.6% on a year-over-year basis. Non-GAAP earnings are anticipated in the range of $1.30-$1.40 per share for the quarter.
Shares increased 1.86% to close at $90.58 on Nov 28. Microchip’s shares have returned 41.2% year to date, substantially outperforming the 26% rally of the industry.
Microcontroller Demand Remains Strong
Microchip stated that microcontroller revenues (almost 66% of total revenues) have increased more than $500 million in the last five quarters on the back of strong demand. The company’s major product lines — 8-bit, 16-bit and 32-bit — were up significantly in the last quarter.
Microchip Technology Incorporated Revenue (TTM)
Microchip Technology Incorporated Revenue (TTM) | Microchip Technology Incorporated Quote
Moreover, Microchip is winning market share as reflected by SIA numbers. The company had a market share of 15.84% in the third quarter, which expanded 138 basis points (bps) from the year-ago quarter.
Management noted that design win funnel continues to be and will increase organic growth. Moreover, acquisitions like SMSC, ISSC, Micrel and Atmel have expanded product portfolio, which is positive for the top-line growth.
Gross Margin Anticipated to Improve
Microchip is aggressively expanding production capabilities. The company plans to bring in-house more assembly and test operations, which are currently outsourced including Atmel’s manufacturing activities.
Microchip is currently engaged in constructing three buildings in Arizona, India and Germany, which upon completion will reduce lease cost. Moreover, the expanded production facilities will help the company achieve growth in a cost-effective manner in the long haul.
This will ultimately help Microchip reach long-term gross margin target of 62.5%.
Zacks Rank & Other Key Picks
Microchip carries a Zacks Rank #2 (Buy). Other top-ranked stocks in the same sector include Analog Devices Inc. ADI, MaxLinear Inc. MXL and Silicon Laboratories Inc. SLAB. You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth for Analog Devices, MaxLinear and Silicon Laboratories are currently pegged at 10.4%, 20% and 15%, respectively.
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