Microchip (MCHP) to Post Q3 Earnings: What's in the Cards?

Microchip Technology Inc.MCHP is set to release third-quarter fiscal 2017 earnings on Feb 7. We note that on average the company has delivered positive earnings surprises in the trailing four quarters, including a massive beat of 18.42% in the last quarter.

Moreover, earnings of 90 cents per share jumped 52.5% from the year-ago quarter primarily driven by strong revenue growth. Following the news, shares jumped more than 6%.

However, in late Nov 2016, the company revised its sales and earnings guidance for the yet-to-be-reported quarter. Non-GAAP net sales were projected to decline in the range of 1-4% with the mid-point to decrease 2.5% compared with the earlier guidance range of flat to down 6% with the mid-point declining 3%.

Further, non-GAAP earnings were expected to be in the range of 87-94 cents per share compared with previous guidance range of 85-89 cents per share.

Microchip Technology Incorporated Price, Consensus and EPS Surprise

Microchip Technology Incorporated Price, Consensus and EPS Surprise | Microchip Technology Incorporated Quote

The narrowed guidance reflected the positive impact from the acquisitions of Atmel and Micrel. The closure of Micrel's 6-inch fab was also anticipated to drive gross margin expansion owing to higher cost inventory from the closed facility was sold and company realized sales from its low cost higher volume factories.

Despite the raised earnings guidance shares dropped a massive 7.5% on Dec 1, 2016, reflecting uncertainty and lack of visibility over Trump administration's economic policy and its impact on the technology sector. We believe that these factors will impact company's results in the third quarter.

However, we note that the shares have rebounded in the first month of 2017. On a year-to-date basis, Microchip has gained 7.3% as compared with the Zacks Semiconductor Analog & Mixed Industry's return of 4.7%.

Let's see how things are shaping up for this announcement.

Factors at Play

We believe that Microchip's growing influence in the automotive segment is a key catalyst. Our view is supported by the fact that many automotive companies like Aston Martin, Pagani Automobili, Audi and Daimler are using Media Oriented Systems Transport (MOST) technology based Intelligent Network Interface Controllers (INICs) chips in their cars. We believe that strong demand for microcontroller products will drive the company's results.

Microchip is expanding its touch business beyond handsets and tablets into areas, such as automotive industrial applications, which is positive in our view. This is further expected to drive top-line growth in the rest of fiscal 2017. Moreover, stringent cost control is a catalyst for operating margin expansion.

In fact, Microchip has noted that it remains on track to achieve long-term operating margin target of 33% by fourth-quarter fiscal 2018.

Earnings Whispers

However, our proven model does not conclusively show that Microchip is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP : Microchip's Earnings ESP is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 81 cents per share. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank : Microchip carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 and 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Applied Optoelectronics AAOI with an Earnings ESP of +15.87% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

American Superconductor AMSC with an Earnings ESP of +42.5% and a Zacks Rank #2.

Pure Storage PSTG with an Earnings ESP of +4.17% and a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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