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Microchip Tech (MCHP) Up 28.7% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Microchip Technology (MCHP). Shares have added about 28.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Microchip Tech due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Microchip Q4 Earnings Top Estimates, Revenues Lag

Microchip Technology Incorporated reported fourth-quarter fiscal 2020 non-GAAP earnings of $1.46 per share, beating the Zacks Consensus Estimate by 6.6%. However, the bottom line declined 1.4% on a year-over-year basis.

Net sales declined 0.3% from the year-ago quarter to $1.326 billion. The top line lagged the Zacks Consensus Estimate of $1.327 billion.

Management noted sluggish demand across automotive, industrial and consumer home appliance end-markets due to coronavirus crisis-induced broad-based macroeconomic weakness.

Nevertheless, revenues improved 3% sequentially, driven by strength in growth in bookings in the fiscal fourth quarter. The upside can be attributed to coronavirus crisis-induced supply chain disruptions. Further, demand across communication and data center end-markets favored top-line growth sequentially.

Quarter in Detail

In terms of product line, microcontroller business (54.7% of net sales) improved 5.9% sequentially to $726.1 million. Microchip benefited from robust demand for its 8-bit, 16-bit and 32-bit microcontrollers.

The company has rolled out a new cryptography enabled 32-bit microcontroller developed with an aim to stop malware for systems. We believe that Microchip's expanding product portfolio driven by new microcontrollers’ roll outs will aid it in expanding customer base and sustain its leading position in the market. Moreover, the company is well poised to capitalize on synergies from accretive Microsemi and Atmel acquisitions.

Analog net sales of $367.5 million (27.7%) improved 1.2% sequentially.

FPGA revenues (7.3%) came in at $96.7 million, up 4.4% on a quarter-over-quarter basis.

Licensing, memory and other, or LMO product line (10.3%) reported revenues of $136.1 million, which declined 6.6% sequentially.

Geographically, revenues from Americas, Europe and Asia contributed 26.7%, 22.1% and 51.2% to net sales, respectively.

Margins

Non-GAAP gross margin contracted 20 basis points (bps) on a year-over-year basis to 62%.

Non-GAAP research & development expenses, as a percentage of net sales, expanded 50 bps year over year to 15.2%. Non-GAAP selling, general & administrative (SG&A) expenses, as a percentage of net sales, remained contracted 80 bps year over year at 10.2%. Non-GAAP operating expenses, as a percentage of net sales, contracted 40 bps year over year to 25.4%.

Consequently, non-GAAP operating margin expanded 20 bps on a year-over-year basis to 36.6%.

Balance Sheet & Cash Flow

As of Mar 31, 2020, cash and short-term investments came in at $403 million, compared with $402.3 million as of Dec 31, 2019.

As of Mar 31, 2020, total debt (long-term plus current portion) amounted to $9.48 billion compared with $9.58 billion as of Dec 31, 2019. Notably, the company paid down $236 million of debt during the quarter.

Cash flow from operating activities was $371.7 million compared with $395.5 million reported in the prior quarter.

Guidance

In an update provided on Jun 3, Microchip improved its business outlook for first-quarter fiscal 2021.

Notably, the company anticipates fiscal first-quarter consolidated net sales in the range of $1.247-$1.326 billion, or between flat and down 6% sequentially (mid-point of 3% decline). Net sales were previously expected in the range of $1.2-$1.3 billion, which suggested a decline of 2-10% sequentially (mid-point of 6% decline).

Moreover, non-GAAP earnings are projected between $1.35 and $1.53 per share, compared with the prior guided range of $1.25-$1.45.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 8.37% due to these changes.

VGM Scores

Currently, Microchip Tech has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Microchip Tech has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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