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Microchip Upgraded to Strong Buy on Reaffirmed Q2 Guidance

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On Sep 6, Microchip Technology Inc. (MCHP - Free Report) was upgraded to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Microchip recently reaffirmed its second- quarter guidance on the back of successful execution of its strategic initiatives, optimization of manufacturing operations and a favorable macro environment.

Management expects fiscal second-quarter 2018 net sales to be approximately $1.00 billion, which reflects growth of approximately 3% on a sequential basis and 14.6% on a year-over-year basis. Earnings are anticipated to be in the range of $1.33–$1.37 per share for the quarter.

Notably, the company’s last reported quarter results were impressive. Adjusted earnings of $1.31 per share were up 56% year over year and 12.9% sequentially. The figure exceeded the company’s expectations. The top line also saw a massive improvement with a 15.2% surge from the year-ago quarter and 7.7% sequential growth to $972.1 million.

Accelerating demand for the company’s products led to the better-than-expected results, which along with an encouraging guidance drove shares. Microchip stock has gained 36.8% year to date, substantially outperforming the 20.3% rally of the industry it belongs to.



Growth Catalysts

Microchip’s microcontroller business is one of the key catalysts behind the company’s robust performance. Strong demand of 8-bit, 16-bit and 32-bit microcontrollers drove the 9.5% sequential and 18.1% year-on-year growth of the segment, which constituted 65.4% of the revenues. The company’s acquisition of Atmel in April 2016 has enriched its microcontroller product portfolio, which aids its bottom line.

Additionally, new products such as PIC32MX1/2 XLP and MOST-based Intelligent Network Interface controllers are anticipated to expand its customer base. Efficient operations are also expected to boost margins.

We believe the company’s initiatives to bridge the gap between lead time, inventory and backlog will be further beneficial for earnings and revenues in the near to middle term. Management expects the balance to be reached by the middle of calendar year 2018.

Key Picks

Stocks worth considering in the broader tech space are Applied Optoelectronics, Inc. (AAOI - Free Report) , Applied Materials, Inc. (AMAT - Free Report) and Micron Technology, Inc. (MU - Free Report) . All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank Stocks here.

The long-term earnings growth rate for Applied Optoelectronics, Applied Materials and Micron are projected to be 17.5%, 17.1% and 10% respectively.

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