Microchip Technology For Growth And Income

| About: Microchip Technology (MCHP)

Microchip Technology (NASDAQ:MCHP) is a leading microcontroller semiconductor company. By market share it is #2 in 8 bit microcontrollers, #8 in 16 bit microcontrollers, and #15 in 32 bit microcontrollers. They also have a growing analog semi business and a small but stable memory business. They serve the industrial, automotive, communication, and computer industries and have over 70,000 end customers with the majority handled through distributors. One thing that sets Microchip apart from most semiconductor companies is that they recognize all revenue as sell out rather than sell in. Because of this their revenue turns down before others in semi cycles but also turns up before others. Note: The March 2012 quarter's revenue was up 3% sequentially with the sequential revenue guide for the June quarter at plus 5%.

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Using Friday's May 11th closing price of $31.90, Microchip's 2Q 2012 dividend of $0.35 gives an annualized dividend yield of 4.4% which is the semiconductor industry's highest. This is significantly higher than Intel's (NASDAQ:INTC), Maxim Semiconductor's (NASDAQ:MXIM), Linear Technology's (NASDAQ:LLTC) 3.3% dividend yield and Analog Device's (NYSE:ADI) 3.2%.

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Recent Acquisitions:

Roving Networks

4/19/12 - "Acquisition of Roving networks an innovator in low-power embedded Wi-Fi® and Bluetooth® solutions based in Los Gatos, Calif. Roving Networks is a privately held, fabless semiconductor developer of Wi-Fi certified transceivers and FCC certified Wi-Fi and Bluetooth modules. The terms of the deal are confidential, and the transaction is expected to be immediately accretive on a non-GAAP basis."

Standard Microsystems Coporation (NASDAQ:SMSC) ... $766M net.

"We believe SMSC's smart mixed-signal connectivity solutions aimed at embedded applications are an ideal complement to Microchip's embedded control business," said Steve Sanghi, Microchip's President and CEO. "This acquisition will expand Microchip's range of solutions as SMSC contributes exciting new products and capabilities in the automotive, industrial, computing, consumer and wireless audio markets, significantly extending our served available market."

"We are excited by the strategic possibilities presented by this acquisition," continued Mr. Sanghi. "SMSC in its most recent fiscal year ending February 29, 2012 reported net sales of $412 million, non-GAAP gross margin of 54.4% of sales, and non-GAAP operating profit of 12% of sales."


Microchip has stated that the December 2011 quarter was the bottom of this semi cycle for them. Microchip has the highest dividend yield of all semis but also a high dividend to Non-GAAP earnings payout ratio at 76%. Assuming the Standard Microsystem Corporation acquisition closes as expected sometime in the 3rd quarter Microchip's revenue will increase almost 30%. SMSC has mid 50's gross margins but the operating margins are 20 points below Microchip's. Microchip has a long history of making acquisitions work with the largest prior to SMSC was the $350M Silicon Storage Technology, Inc. acquisition in April of 2010. One has to assume that with synergies Microchip's management will be able to raise the operating margins significantly.

The only caveat I have is we are heading into the summer months which historically are not the best of times for semiconductor stock prices. Therefore I have put Microchip Technology on my watch list and will monitor as we head closer to the closing of the SMSC acquisition.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MCHP over the next 72 hours.