Microchip Technology (MCHP) Up 12.7% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Microchip Technology Incorporated MCHP. Shares have added about 12.7% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is MCHP due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Recent Earnings

Microchip Technology reported fourth-quarter fiscal 2018 non-GAAP earnings of $1.40 per share, surpassing the Zacks Consensus Estimate by 5 cents. The figure improved 20.7% year over year.

The year-over-year upside was driven by higher net sales, which increased 11% from the year-ago quarter to $1 billion. The Zacks Consensus Estimate for revenues was pegged at $984.5 million.

Quarter Details

In terms of product line, microcontroller business (66% of net sales) increased 12.2% year over year to $657.3 million. Analog net sales came in at $242.3 million and accounted for 24.5% of the total revenues.

Microchip posted non-GAAP gross margin of 61.7%, which expanded 250 basis points (bps) on a year-over-year basis.

Non-GAAP operating expenses, as percentage of revenues, were down 150 bps year over year to 22.2%. The decline was primarily due to lower research & development (R&D) expenses and selling, general & administrative (SG&A) expenses, both of which shrunk 70 bps.

As a result, non-GAAP operating margin advanced 390 bps from the year-ago quarter to 39.5%.

Balance Sheet

The company exited fiscal 2018 with $2.2 billion of cash and short-term investments. During the fiscal fourth quarter, Microchip generated $359.6 million of operating cash flow.

Management noted that inventory during the March 2018 quarter, was at 112 days, down by three days from the December 2017 quarter level. Also, inventory days remained below the company’s targeted range of 115-120 days.

The company announced a quarterly cash dividend of 36.35 cents per share, which is payable on Jun 4, 2018.

Guidance

Microchip forecasts first-quarter fiscal 2019 net sales of $1.012-$1.062 billion (mid-point $1.037 billion).

Non-GAAP gross margin is anticipated in the 61.6-62% range. Non-GAAP operating expenses, as percentage of sales, are projected at 22-22.4%, and operating margin is expected at 39.2-40%.

For the fiscal first quarter, non-GAAP earnings are anticipated in the range of $1.39-$1.49 per share (mid-point $1.44).

Microchip's inventory days in the impending quarter are expected between 106 and 116 days. Capital expenditures are estimated in the range of $70-$90 million.

For fiscal 2019, capital expenditures are projected at $200-$250 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. There have been seven revisions higher for the current quarter compared to one lower.

Microchip Technology Incorporated Price and Consensus

 

Microchip Technology Incorporated Price and Consensus | Microchip Technology Incorporated Quote

VGM Scores

At this time, MCHP has a great Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth and momentum investors than value investors.

Outlook

Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. It comes with little surprise MCHP has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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