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What's in the Offing for Microchip (MCHP) in Q3 Earnings?

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Microchip Technology Inc. (MCHP - Free Report) is set to release fiscal third-quarter 2018 earnings on Feb 6. We note that the company has delivered positive earnings surprise in each of the trailing four quarters with an average surprise of 9.26%.

Adjusted earnings surged 50% year over year and 7.6% sequentially to $1.41 per share in the last reported quarter, which beat the Zacks Consensus Estimate by 6 cents. The strong growth was driven by higher net sales, which increased 15.8% from the year-ago quarter to $1.01 billion. On a sequential basis, net sales increased almost 4.1%.

Guidance & Estimates

Microchip reaffirmed its third-quarter fiscal 2018 guidance backed by successful execution of its strategic initiatives, optimization of manufacturing operations and a favorable macro environment.

For the third quarter, Microchip expects total revenues to be in the range of $971.7 million to $1.01 billion and non-GAAP earnings in the range of $1.30 to $1.40 cents per share. The Zacks Consensus Estimate for earnings is pegged at $1.35 per share, in line with the mid-point of the guidance. Revenues are estimated to be $992.17 million for the quarter.

Moreover, the company plans to bring in house more of the assembly and test operations that are currently outsourced, which will ultimately improve gross margin.

Microchip’s stock has gained 36.1% in the past year, substantially outperforming the 26.5% rally of the industry it belongs to.

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

Factors in Play

Microchip unveiled a single-wire, Electrically Erasable Programmable Read-Only Memory (EEPROM) device, which will help in remote identification of electronic components. The company also launched CryptoAuthentication device, which will allow developers to integrate hardware-based security to their designs. Additionally, it announced a third-party security design partner program.

Notably, these enhanced its product portfolio during the quarter and are likely to boost its top line in the to-be-reported quarter.

Moreover, during the quarter, Microchip announced that it has improved response time for critical system events to help designers create CAN-based applications, without any added complexity. This will help the company to acquire new customers and boost revenues.

Additionally, the company also announced collaboration with Amazon Web services (AWS) to support AWS offerings as well as develop secure cloud systems.

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

Moreover, acquisitions like SMSC, ISSC, Micrel and Atmel have expanded product portfolio, which will aid top-line growth.

Microchip is currently engaged in constructing three buildings in Arizona, India and Germany, which upon completion will reduce lease cost. Moreover, the expanded production facilities will help the company achieve growth in a cost-effective manner in the long haul.

What Does Our Model Say?

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Microchip has a Zacks Rank #3 and an Earnings ESP of -0.22%, which makes our surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks to Consider

Here are a few stocks you may want to consider as our proven model shows that these have the right combination of elements to post an earnings beat this quarter.

Kemet (KEM - Free Report) has an Earnings ESP of +2.94% and a Zacks Rank #1.You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA (NVDA - Free Report) has an Earnings ESP of +4.71% and a Zacks Rank #2.

Square (SQ - Free Report) has an Earnings ESP of +1.84% and a Zacks Rank #3.

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