Earnings Preview: Microchip Technology

Microchip Technology Incorporated ( MCHP - Analyst Report ) expects to report net sales of $407 million – $408 million in the second quarter of fiscal 2012.

Last month, the company lowered its forecast citing weak economic environment, which continues to adversely impact the company’s business as well as the overall semiconductor industry.

Microchip had earlier projected sales between $412 million and $430 in the second quarter. However, management stated that the lower-than-anticipated net sales activity in the September quarter was driven primarily by macroeconomic and industry conditions.

This apart, Microchip, which competes with companies likeAtmel Corporation ( ATML - Analyst Report ) , did not provide any further details.

Consequently, earnings estimates for fiscal 2012 have declined significantly in the last few days as most analysts have decreased their estimates based on the company’s lowered guidance.

Six out of the eight analysts have reduced their estimates in the last 30 days resulting in a 12 cent decline in earnings estimates for fiscal 2013. For the second quarter of fiscal 2013, earnings estimates have gone down by 3 cents.

For fiscal 2014, four out of the seven analysts covering the stock lowered their estimates leading to a 14 cent decline in earnings estimates.

On August 2, 2012, Microchip acquired Standard MicroSystems Corporation to expand its smart mixed-signal connectivity solutions for embedded applications in markets such as automotive, industrial, computing, consumer and wireless audio. The integration process is underway and management expects the acquisition to be accretive to the bottom line in the September quarter.

The company’s first quarter result missed the Zacks Consensus Estimate by a penny. Microchip generated net revenues of $352.1 million, up 3.9% sequentially but down 6.0% from the year-ago quarter. Europe continues to be weak with no signs of revival in the coming months. China, which is touted as the company’s growth engine, is also slowing down. Hence, a significant improvement in business is not in the cards in the near term.

Organic growth also remains a concern. We, therefore, prefer to be on the sidelines and maintain a Neutral recommendation on Microchip in the long run. However, we currently have a Zacks #4 Rank, which translates into a short-term rating of Sell.