Microchip Gains Momentum

| About: Microchip Technology (MCHP)

We recently maintained our Neutral recommendation on chipmaker Microchip Technology Incorporated (NASDAQ:MCHP).

Earnings estimates for fiscal 2011 have advanced by $0.04 in the last sixty days as the company reported better-than-expected results for the third quarter. Earnings per share came in at $0.53 in the third quarter, beating the Zacks Consensus Estimate by a penny.

We believe Microchip Technology’s top line has gained momentum after taking a hit in the second half of calendar 2008 and first half of calendar 2009.

Microchip is well positioned in its core microcontroller market, which continues to propel growth for the company. Increasing demand for embedded control systems made the market for microcontrollers one of the larger segments in the semiconductor market. Microchip continues to see an improvement in end market demand across all product lines.

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. The company is targeting the high-performance 16-bit microcontroller market, and demand is reflecting strong momentum. In addition, the 32-bit microcontroller product line continues to make good progress.

In April 2010, Microchip acquired Silicon Storage Technology for $295.4 million. Silicon Storage is a global leader in embedded flash technology along with licensing of these technologies. The restructuring and integration of SST is now complete.

Microchip expects significant operational synergies from its memory business and technology synergies with Microchip’s micro controller business. The acquisition not only makes use of a strong cash balance, it also strengthens the company’s product portfolio.

However, the outlook for the March quarter expects some seasonality due to the Lunar New Year in Asia. Microchip expects net sales for the March quarter between $367.8 million and $378.9 million. Gross margin is projected around 59.9% – 60.1%. Earnings per share are projected between $0.49 and $0.52.

We are a bit concerned about the inventory correction in the semiconductor industry and hence maintain our Neutral recommendation. Our recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of “Hold”.