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Why Is Microchip Technology (MCHP) Up 9.9% Since the Last Earnings Report?

It has been about a month since the last earnings report for Microchip Technology Incorporated MCHP. Shares have added about 9.9% in that time frame, outperforming the market.

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

Microchip Beats on Q4 Earnings, Raises Guidance

Microchip  reported fourth-quarter fiscal 2017 adjusted earnings (including stock-based compensation) of $1.10 per share, which beat the Zacks Consensus Estimate by $0.11.

Adjusted earnings (excluding stock-based compensation) advanced 65.7% year over year and 10.5% sequentially to $1.16 per share in the quarter. Atmel contributed $25 cents better than management’s expectation of 18–22 cents.

The strong growth was also driven by higher net sales, which surged 58.8% from the year-ago quarter to $902.7 million. On a sequential basis, net sales increased almost 2.4%. The figure was within management’s guided range of $872–$908 million. Book-to-bill ratio was approximately 1.10.

Quarter Details

In terms of product line, microcontroller business (64.3% of net sales) increased 0.3% sequentially driven by robust performance from 8-bit, 16-bit and 32-bit microcontroller businesses. These benefited from the addition of Atmel’s product portfolio.

Analog sales (25.5% of net sales) increased 1.1% from the previous quarter. Memory sales (5% of net sales) declined 2.3% on a quarter-over-quarter basis. Licensing (2.6% of net sales) sales decreased 3.2% sequentially. MMO (2.6% of net sales) slumped 12.8% from the previous quarter.

Microchip posted adjusted gross margin (including stock-based compensation) of 58.9%, which expanded 180 basis points (bps) on a year-over-year basis and 140 bps sequentially.

Non-GAAP operating expenses declined from 46.6% to 25.7% in the reported quarter, primarily due to lower research & development (R&D) and selling, general & administrative (SG&A), which declined 280 bps and 110 bps, respectively.

As a result, non-GAAP operating margin expanded 480 bps from the year-ago quarter and 280 bps sequentially. Atmel achieved operating margins of more than 30% in the quarter.

Balance Sheet

Cash generated in the reported quarter was $322.6 million as compared with $290.8 million at the end of Dec 31. As of Mar 31, cash and total investment position was $1.30 billion as compared with $669.6 million.

Microchip had no borrowings under its revolving line of credit at the end of March. As part of the refinancing activities, the company exchanged some of the 2.125% 2037 bonds issued in 2007 for newly issued 2.25% 2037 bonds during the quarter.

Leverage continues to improve with net debt-to-EBITDA at 1.94 down from 2.47 at the end of the December quarter.

Outlook

Microchip forecasts first-quarter fiscal 2018 net sales to be in the range of $920.7–$965.9 million, which reflects a range of 2–7% growth on a sequential basis.

Gross margin was anticipated to in the range of 59.5–60%, operating expense as percentage of 23–25% and operating margin 36–37%. Earnings are anticipated to be in the range of $1.17–$1.27 per share for the quarter. Atmel is forecasted to contribute $0.18–$0.22 per share.

Capital expenditure is estimated to be approximately $60 million. Net cash generated in the quarter is anticipated to be $230–$250 million.

Management expects net debt-to-EBITDA to be about 1.65 by the end of the first quarter.

For fiscal 2018, capital expenditures are expected to be approximately $170 million. Based on strong fourth-quarter results, Microchip revised long-term growth targets to 62.5% gross margin (up from 60%), 22.5% operating expenses (down from 24%) and 40% operating margin (up from 36%).

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There has been one revision higher for the current quarter.

Microchip Technology Incorporated Price and Consensus

 

Microchip Technology Incorporated Price and Consensus | Microchip Technology Incorporated Quote

VGM Scores

At this time, the stock has a nice Growth Score of 'B', a grade with the same score on the momentum front. However, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% 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.

Zacks' style scores indicate that the company's stock is equally suitable for growth and momentum investors.

Outlook

While estimates have been moving upward, the magnitude of the revision is net zero. It comes with little surprise that the stock sports a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.


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