Microchip Earnings: Appears Spring-Loaded for a Rebound in Chip Orders

Morningstar’s Metrics for Microchip Technology

• Fair Value Estimate: $63.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Microchip Technology’s Earnings

Microchip Technology MCHP reported fiscal fourth-quarter revenue of $970 million, down 27% year over year but ahead of guidance. June-quarter revenue is expected to be ahead of FactSet consensus estimates and rise 8% sequentially at the midpoint of guidance.

Why it matters: Microchip is calling the bottom on the brutal cyclical downturn that weighed its the business for the past several quarters. Order patterns are improving, while many of its customers are reducing their chip inventories.

• March-quarter revenue fell 5% sequentially but was ahead of guidance of $960 million. Microchip’s adjusted gross margin of 52% missed its outlook of 53%, but we’re not concerned, as the miss stemmed from more aggressive inventory reductions.

The bottom line: We maintain our $63 fair value estimate for wide-moat Microchip. Shares were up as much as 8% after hours, and we’re encouraged by Microchip’s aggressive recovery actions and hopeful for a snapback in demand.

Coming up: Revenue is forecast to be $1.045 billion in the June quarter, down 16% year over year but up 8% sequentially. Management hinted that it is optimistic for the September quarter as well, since orders are accelerating and excess inventory at customers is being reduced.

• Chip orders in April exceeded all three months in the prior quarter, as one data point that management provided regarding its optimism.
• In the longer term, Microchip believes it should benefit from nice operating leverage as chip orders recover, and the firm reiterated its long-term adjusted gross margin target of 65%.