We have upgraded our rating to Outperform from Neutral on Microchip Technology Inc. (MCHP).

Microchip recently increased its guidance for its fiscal fourth quarter of 2010, driven by increased demand from customers in Asia and Europe. China, in particular, continues to be strong after the New Year, while Europe is expected to exceed seasonally strong March quarter results. The company now expects sales to be up 8% sequentially compared with the previous guidance of 3% – 7%. The revised guidance implies a revenue guidance of $270.1 million.

Gross margin is now projected at the high end of the prior guidance of 60.25%. Operating expenses are forecasted to be 26.2% of total revenues. Earnings per share (EPS) are estimated at 42 cents, up from the previous estimate of 39 – 41 cents.

Microchip expects record bookings in the quarter, which bodes well for the next quarter. Inventory is expected to be flat to down in the March quarter.

Third quarter results beat expectations, driven by broad-based growth from revenues from all three product lines − Microcontrollers, Analog and Serial EEPROMs.

Microchip recently acquired Silicon Storage Technology Inc., a global leader in embedded flash technology and in the licensing of these technologies. It has several other businesses including serial, parallel and specialty flash memories.

Silicon’s proprietary SuperFlash technology is a critical building block technology for advanced microcontrollers. This acquisition secures critical embedded flash technology for Microchip’s core microcontroller business and will enable the company to get early access to advanced technologies rather than waiting until they are in production at the foundries.

The transaction is expected to be accretive to the company’s business in the first full quarter after acquisition.

With signs of recovery, we raise our estimates following management’s upbeat guidance and expect Microchip to deliver solid results in the coming quarters. The dividend yield of 4.49% continues to be the key attractive feature of the stock.
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