We recently downgraded our recommendation on chipmaker
Microchip Technology Incorporated
) to Underperform from Neutral, following dismal results for the
second quarter of fiscal 2013 and disappointing guidance.
Earlier in the month, Microchip reported its second quarter
2013 results, which missed the Zacks Consensus Estimate and
represented the second consecutive quarter of estimate miss.
Sales continued its downward trend, hurt by weak European
markets and uncertain economic environment in the U.S. and China.
Margins were also hit by increased acquisition charges.
Consequently, all the seven analysts covering the stock
reduced their estimates for 2013, leading to a significant
decline in earnings estimates.
Similarly, for 2014, all the six analysts covering the stock
reduced their estimates causing a steep decline in
We do not foresee a significant improvement in business in the
near term. The company's guidance was also weak. The weak
economic environment coupled with deceleration in worldwide GDP
growth continues to plague Microchip. All the three product lines
of Microchip - microcontroller, analog and memory along with
Standard Microsystems business - are projected to be soft.
In addition, high level of inventory also remains a matter of
concern. Microchip is reducing wafer starts in the fabs and
putting fab personnel on a rotating time-off schedule in order to
reduce costs and maintain staff to ramp up production as and when
required. This process is expected to impact gross margins till
June 2013, by which time management expects to see end of
inventory correction and recovery in business.
We are also skeptical about the company achieving the targeted
synergies from the recent Standard Microsystems acquisition as
the weak economic environment continues to adversely impact the
business of Standard Microsystems.
Although Microchip Technology, which competed with the likes
), is one of the fastest growing providers of 16-bit and 32-bit
microcontrollers and has one of the highest dividend yields in
the industry, the current economic scenario compels us to have a
negative stance on the company.
Our Underperform recommendation is supported by a Zacks #5
Rank, which translates into a short-term rating of Strong
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