Following robust earnings in its latest quarter, we have reiterated our Outperform recommendation on Microchip Technology Inc. (MCHP).
Microchip reported solid results for the first quarter of fiscal 2011 driven by broad-based growth across all geographical regions as well as the three product lines – Microcontrollers, Analog and Serial electrically erasable programmable read only memory products (EEPROMs).
We believe the top-line has gained momentum at Microchip Technology after taking a hit in late 2008 and early 2009. The first quarter of fiscal 2011 marked its fifth consecutive quarter of revenue growth.
Microchip is well positioned in its core microcontroller market. The increasing demand for embedded control systems – approximately $10.7 billion in 2009 – has made microcontrollers one of the larger segments in the semiconductor market. Microchip is among the top five players in the global microcontrollers market.
In late 2008 – early 2009, the downturn in the U.S. and global economies adversely impacted the company’s key markets. However, Microchip has seen an improvement in end market demand across all product lines in the last twelve months.
Microchip continues to be a leading player in the 8-bit and 16-bit microcontroller space. Design activities for 8-bit flash microcontrollers continue to be strong. In addition, Microchip is targeting the high-performance 16-bit microcontroller market and the demand is reflecting strong momentum. Thirdly, the 32-bit microcontroller product line continues to make good progress.
The Analog business continues to be strong with solid growth from linear, interface, mixed-signal, safety, security and radio frequency product lines.
Microchip has provided strong guidance for the second and third quarters. Sales are expected to grow at 6% – 7% sequentially in the September quarter. For the December quarter, management continues to see robust demand driven by exceptionally strong new design wins in all of the strategic product lines.
Microchip will increase its manufacturing capacity to meet the projected demands of all of its customers in the December quarter. The company currently expects sales to grow 3% sequentially.
With signs of recovery and continued strong performance, we remain positive on the stock and expect Microchip to deliver solid results in the coming quarters. The dividend yield of 4.80% continues to be the key attractive feature.
However, the stock carries a Zacks #3 Rank which translates into a short-term rating of Hold. This might be due to the fears of a recessionary double-dip in the latter half of 2010, which will adversely impact capital spending in the technological sector along with extended lead times in the semiconductor industry.
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