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Is a Surprise in Store for Microchip (MCHP) in Q1 Earnings?

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Microchip Technology Inc. (MCHP - Free Report) is set to release first-quarter fiscal 2018 earnings on Aug 3. We note that on average the company has delivered positive earnings surprises in three of the trailing four quarters, including an impressive beat of 11.11% in the last quarter.

Moreover, adjusted earnings (excluding stock-based compensation) advanced 65.7% year over year and 10.5% sequentially to $1.16 per share in the quarter. The strong growth was 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%.

Meanwhile, the company revised sales and earnings guidance for the going-to-be-reported quarter in early June. The company now forecasts non-GAAP net sales to be in the range of 4.5–6% (mid-point at 5.25%) as compared with earlier guidance range of 2–7% (mid-point at 4.5%), up on a sequential basis.

Further, non-GAAP earnings are now expected to be in the range of $1.22–$1.26 per share, as compared with previous guided range of $1.17–$1.27.

Microchip’s stock has gained 24.8% year to date, substantially outperforming the 15.6% rally of the industry it belongs to. The outperformance is driven by consistent results as well as the revised guidance that reflects product portfolio strength.


Let’s see how things are shaping up for this announcement.

Factors at Play

Microchip’s microcontroller business (64.3% of fourth-quarter revenues) continues to outperform the industry and has enabled it to gain significant market share. Moreover, the company’s microcontroller business is evidently benefiting from the addition of Atmel’s product portfolio (5 cents incremental benefit in the last quarter), which it acquired in Apr 2016.

We believe that newly launched products like PIC32MX1/2 XLP and MOST-based Intelligent Network Interface controllers will continue to expand customer base. Moreover, improving operating efficiency and leverage will boost gross margin in the going-to-be reported quarter.

Earnings Whispers

However, our proven model does not conclusively show that Microchip is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Microchip’s Earnings ESP is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.14 per share. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Microchip carries a Zacks Rank #2, which increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Broadcom (AVGO - Free Report) has an Earnings ESP of +2.57% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NetEase (NTES - Free Report) has an Earnings ESP of +0.25% and carries a Zacks Rank #2.

CACI International (CACI - Free Report) has an Earnings ESP of +1.83% and carries a Zacks Rank #2.

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