We recently upgraded our recommendation on Microchip Technology Incorporated (MCHP) to Neutral from Underperform.
We believe that Microchip was among the first to see the downturn as well as the industry’s correction. December quarter results were in line with management expectations as the industry was going into a broad-based demand weakness and inventory correction. Management believes that the December quarter was a bottom quarter and the company should see sequential growth in March quarter.
Orders have shown improvement of late and we expect Microchip to benefit from the sector’s recovery in recent times.
Microchip continues to be the fastest growing provider of 16-bit and 32-bit microcontrollers. The company is increasingly ramping its touch business beyond handsets and tablets in areas such as automotive industrial applications.
Microchip acquired Silicon Storage Technology in 2010, a global leader in embedded flash technology along with licensing of these technologies. The company expects significant operational synergies from its memory business and technology synergies with Microchip’s micro controller business.
Meanwhile, the company continues to take steps to increase shareholder value as well. Microchip raised its dividend from $0.348 per share in the September quarter to $0.349 per share. The dividend yield of 3.91% is one of the highest in the industry.
However, we remain concerned about high-levels of inventory and increasing lead times. Earnings estimates have been on static in the last few days.
Nevertheless, based on improved outlook for the coming quarters, we upgrade our recommendation to Neutral from Underperform. Our Neutral recommendation is supported by Zacks #3 rank, which translates into a short-term rating of Hold.
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