We continue to see an attractive margin of safety for investors in wide-moat Microchip Technology (MCHP), thanks to both the U.S. stock market correction in early February and a post-earnings sell-off associated with near-term revenue growth deceleration. We still view the sales growth deceleration as quite normal, in light of looming tough comparisons after a stellar calendar 2017 for Microchip and its peer group, and we can justify our valuation even if the firm were to fall modestly short from its long-term organic midcycle revenue growth target of 7%-9%. We think Microchip has an exemplary management team, and the firm has been especially wise on the M&A front, while we see the potential for additional deals on the horizon. We also maintain our wide moat rating for Microchip, thanks to high customer switching costs for its products and intangible assets based on decades of chip design and manufacturing expertise. With shares trading in the mid-$80 range and dipping even as low as $78 earlier this month, we view shares as attractively valued relative to our unchanged $97 fair value estimate.
Microchip will host an Investor Day on Thursday and we wouldn’t be surprised if the company were to update its long-term financial targets at the event. Microchip’s existing long-term adjusted operating margin target of 40% is clearly within reach, as higher sales levels and synergies from recent acquisitions of Atmel and Micrel have lifted adjusted operating margins from the low 30% range to 39% in the December quarter. We still model some modest operating leverage from here to the 42% range by fiscal 2022. We are also not purely counting on revenue growth for such leverage, as our midcycle revenue forecasts call for 6% organic growth, slightly short of the firm’s target.
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Brian Colello, CPA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.