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Microchip (MCHP) Looks Promising: Should You Buy the Stock?

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A successful investor understands the importance of adding well-performing stocks in the portfolio at the right time. Notably, indicators of a stock’s bullish run include a rise in share price and strong fundamentals.

Microchip Technology Inc. (MCHP - Free Report) is one such technology stock that has been on healthy growth trajectory, of late. The company’s shares have returned 42.2% year to date, substantially outperforming the 27.3% rally of the industry.

Let’s delve deeper and take a look at some of the aspects aiding the performance.

Upbeat Q2 Results

The company reported second-quarter fiscal 2018 adjusted earnings of $1.41 per share, which beat the Zacks Consensus Estimate by 6 cents. The figure improved 50% year over year and 7.6% sequentially.

The upside was driven by higher net sales, which increased 15.8% from the year-ago quarter and 4.1% sequentially to $1.01 billion. This marked the first quarter in which the company recorded more than $1 billion in sales.

Positive Earnings Surprise History

Microchiphas an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 9.3%.

Further, it has a long-term expected EPS growth rate of 12.2%.

Upward Estimate Revisions

In the last 60 days, the Zacks Consensus Estimate for Microchip’s current quarter and current year witnessed upward revisions. For the current quarter, the Zacks Consensus Estimate is currently pegged at $1.35 per share, up from earnings of $1.31 per share earlier. Similarly, the Zacks Consensus Estimate for current year is currently pegged at $5.45 per share compared with $5.29 projected 60 days ago.

Other Driving Factors

Microchip stated that microcontroller revenues (almost 66% of total revenues) have increased more than $500 million in the last five quarters on the back of strong demand. The company’s major product lines — 8-bit, 16-bit and 32-bit — were up significantly in the last quarter. We believe that Microchip's expanding product portfolio driven by new launches will continue to expand customer base.

Moreover, the company is winning market share as reflected by SIA numbers. It had a market share of 15.84% in the third quarter, which expanded 138 basis points from the year-ago quarter.

Management noted that design win funnel continues to be and will increase organic growth. Moreover, acquisitions like SMSC, ISSC, Micrel and Atmel have expanded product portfolio, which is positive for top-line growth.

Bottom Line

Looking at these positives, we believe that Microchip is one technology stock that deserves a place in investors’ portfolio.

Microchip is currently trading at a lower price/earnings (P/E) multiple than the industry average. Therefore, we believe that Microchip with its lower forward P/E valuation of 16.3x compared with the industry average of 27.5x may be a great bet.

Thus, investing in this stock can yield returns in the short term.

Zacks Rank & Other Key Picks

Microchip carries a Zacks Rank #2 (Buy).

NVIDIA Corporation (NVDA - Free Report) , Intel Corporation (INTC - Free Report) and Analog Devices, Inc. (ADI - Free Report) are some other top-ranked stocks in the same sector. All the three companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA, Intel and Analog Devices have a long-term earnings growth rate of 10.3%, 8.4% and 10.4%, respectively.

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