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Microchip Guides Higher Q1 Earnings on Microsemi Synergies

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Microchip Technology Incorporated (MCHP - Free Report) recently revised first-quarter fiscal 2019 outlook following the completion of Microsemi buyout.

The company recently completed the acquisition of Microsemi for $10.3 billion. The deal worth $10.15 billion in total enterprise value was announced on Mar 1, 2018. The deal is anticipated to be immediately accretive for Microchip’s earnings on a non-GAAP basis.

Management now envisions Microsemi acquisition to raise non-GAAP net sales by $160 million-$180 million. Consequently, total non-GAAP net sales are now anticipated in the range of $1.172-$1.242 billion, up from the previously guided range of $1.012-$1.062 billion. This new guided figure represents sequential growth rate to be in the range of 17% to 24%. The Zacks Consensus Estimate for revenues is pegged at $1.04 billion.

Microchip also raised the guidance for earnings as it anticipates Microsemi buyout to be accretive immediately and contribute around 2-6 cents. Management now projects earnings to range between $1.41 per share and $1.55 per share. The previously anticipated range was $1.39-$1.49 per share. The Zacks Consensus Estimate for earnings is pegged at $1.45 per share.

Shares of Microchip have gained 18.7% in the last year, outperforming the industry’s rally of 16.5%. This outperformance can primarily be attributed to solid demand witnessed by company’s product portfolio and synergies from accretive acquisitions. End-market diversification and operational efficiencies are other tailwinds.



Accretive Acquistions: Key Driver

Robust adoption of Microsemi’s expanding product portfolio holds promise. Moreover, Microsemi has been benefiting from strong demand for its products in data centers and aerospace & defense market.

The company had been witnessing impressive performance across its end markets over the past few quarters. Growth in broadband gateway end markets has contributed positively to its communications segment in the last quarter.

Further, strong satellite and space applications led to robust results in aerospace & defense market. Further, improving conditions in data centers have contributed well to top-line growth.

Microchip is well poised to capitalize on Microsemi’s growth catalysts. Apart from a robust portfolio, the buyoutis likely to expand Microchip’s total addressable markets. Strong demand for Microsemi’s solutions in Data Center, Communications, Defense & Aerospace markets make us optimistic about Microchip’s long-term growth prospects.

Accretive acquisitions like that of Atmel, in the recent past, have also expanded Microchip’s product portfolio and continue to aid top-line growth.

Notable Points

Collaboration with Amazon’s (AMZN - Free Report) Amazon Web services (“AWS”) to support AWS offerings as well as develop secure cloud systems augurs well for the company.

Microchip continues to benefit from enhancing its solution range and improving capacity constraints along with design wins. This provides it a competitive edge in the semiconductor industry.

Strength in cash balance enables Microchip to make lucrative acquisitions like that of Microsemi, Atmel, to mention a few.
 


Zacks Rank & Key Picks

Microchip carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the broader technology sector include Seagate (STX - Free Report) and NVIDIA Corporation (NVDA - Free Report) , both sporting a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Seagate and NVIDIA have a long-term expected EPS growth rate of approximately 18.9% and10.3%, respectively.

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