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Microchip (MCHP) Up 7.2% Since Earnings Report: Can It Continue?

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About a month has gone by since the last earnings report for Microchip Technology Incorporated (MCHP - Free Report) . Shares have added about 7.2% 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 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.

Recent Earnings

Microchip reported first-quarter fiscal 2018 adjusted earnings of $1.31 per share, which beat the Zacks Consensus Estimate by 8 cents.

Adjusted earnings advanced 56% year over year and 12.9% sequentially and was better than management’s updated guidance range of $1.22-$1.26.

The strong growth was also driven by higher net sales, which surged 15.2% from the year-ago quarter to $972.1 million. On a sequential basis, net sales increased 7.7%.

In terms of product line, microcontroller business (65.4% of net sales) increased 9.5% sequentially driven by robust demand for 8-bit, 16-bit and 32-bit microcontrollers. On a year-over-year basis revenues increased 18.1%, benefitting from the addition of Atmel’s product portfolio.

Analog sales (24.6% of net sales) increased 3.7% from the previous quarter. Revenues were negatively impacted by capacity constraint at Atmel. On a year-over-year basis, revenues increased 11.2%.

Memory sales (5% of net sales) were up 8.8% on a quarter-over-quarter basis.

Licensing (2.6% of net sales) sales increased 8.5% sequentially. MMO (2.4% of net sales) declined 0.5% from the previous quarter.

Geographically, Asia remained Microchip’s largest market, with 58% of net sales coming from the region. Europe and Americas contributed 23.2% and 18.8%, respectively.

Microchip posted non-GAAP gross margin of 60.4%, which expanded 460 basis points (bps) on a year-over-year basis and 150 bps sequentially. The figure was better than management’s expectation of 60%.

Non-GAAP operating expenses, as percentage of revenues, declined from 28.4% in the year-ago quarter to 22.9% in the reported quarter. The decline was primarily due to lower research & development (R&D) and selling, general & administrative (SG&A), which declined 320 bps and 230 bps, respectively.

As a result, non-GAAP operating margin expanded to 37.5% in the reported quarter from 27.4% in the year-ago quarter and 33.1% in the previous quarter. The figure was well above the high-end of the management’s guidance of 37%. Atmel achieved operating margins of more than 30% in the quarter.

Cash generated in the reported quarter was $345 million as compared with $322.6 million at the end of Mar 31. As of Jun 30, cash and total investment position was $1.65 billion as compared with $1.30 billion.

Management noted that inventory at Jun 30, was at 100 days, which was the lowest in 7 years. Distributor inventory at 31 days was also on the lower end of the company’s normal range.

Leverage continues to improve with net debt-to-EBITDA at 1.58 down from 1.94 at the end of the March quarter.

Guidance

Microchip forecasts second-quarter fiscal 2018 net sales to be $1.00 billion, which reflects approximately 3% growth on a sequential basis and 14.6% on a year-over-year basis.

Gross margin was anticipated to in the range of 60.5–60.75%, operating expenses as percentage of 22.5–23% and operating margin 37.5–38.25%.

Earnings are anticipated to be in the range of $1.33–$1.37 per share for the quarter. Atmel is forecasted to contribute 18–22 cents per share.

Microchip's inventory days at Sep 30, are expected to be 99 to 101 days. Capital expenditure is estimated to be approximately $70 million. Net cash generated in the quarter is anticipated to be $230–$250 million.

Management expects net debt-to-EBITDA to be under 1.3 by the end of the second quarter of fiscal 2018.

For fiscal 2018, capital expenditures are expected to be approximately $180 million up $10 million from the previous guidance.

Microchip forecasts annual growth expectations of high single digit growth over the long term.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been six revisions higher for the current quarter In the past month. The consensus estimate has shifted by 8.1% due to these changes.

VGM Scores

At this time, Microchip's stock has a strong Growth Score of A, though it is lagging a lot on the momentum front with an F. The stock was allocated also 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth investors based on our style scores.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising. It comes with little surprise that the stock has a Zacks Rank #1 (Strong Buy). We are expecting an above average return from the stock in the next few months.




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