Last week, Microchip Technologies (MCHP) raised its outlook for the fourth quarter of fiscal 2010. The company now expects sales to be up 8% sequentially compared to the previous guidance of 3% – 7%. The revised guidance implies a revenue guidance of $270.1 million.
Microchip earlier demonstrated solid growth in the third quarter, driven by strength across all three product lines − Microcontrollers, Analogs and Serial EEPROMs. Earnings per share are now estimated at 42 cents, up from the previous estimate of 39 – 41 cents.
AGREEMENT- ESTIMATE REVISIONS
Following the upgrade in outlook by management, estimates for Microchip have been on the rise. Nine out of the fourteen analysts covering the stock have raised their estimates for fiscal 2010 in the past thirty days while one analyst moved in the opposite direction. For fiscal 2011, nine out of the thirteen analysts covering the stock raised their estimates. There was no revision in the opposite direction. For the quarter ending March 2010, eleven out of the thirteen analysts covering the stock have upped their estimates. There was no revision in the opposite direction.
MAGNITUDE CONSENSUS ESTIMATE TREND
The current Zacks Consensus Estimate for 2010 is $1.11, up one cent in the past 30 days. For fiscal 2011, the current Zacks Consensus Estimate is $1.58, up four cents in the last thirty days, signaling a 41.28% year-over-year growth in the bottom line.
Microchip has consistently met or exceeded its guidance. In the third quarter, the company delivered a positive surprise of 13.79% and a positive surprise of 9.09% in the second quarter. On an average, Microchip has come ahead of the Zacks Consensus Estimate by 10.01% in the last four quarters. The current Zacks Consensus Estimate for the fourth quarter is 37 cents, up by a penny in the last 30 days.
NEUTRAL ON MICROCHIP
Management indicated that demand for its products continues to be robust in Asia and Europe. In particular, China continues to be strong after the New Year while Europe is expected to exceed seasonally strong March quarter results.
Microchip is expected to have record bookings in the current quarter, which bode well for the next quarter. With the economy showing signs of recovery and rising chip sales, Microchip continues to see excellent design win traction in strategic product lines. This should boost the top
line.
Meanwhile, in response to the economic downturn, Microchip implemented certain cost reduction measures (headcount reduction, shutting down of fabs, reducing production levels and a pay-cut for its employees). This helped margins in the third quarter and should boost the bottom-line going forward. Our long term recommendation for Microchip is Neutral, supported by its Zacks Rank #3.
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