Microchip (MCHP) Upgraded to Strong Buy on Revised Guidance

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On Jun 23, Microchip Technology IncorporatedMCHP was upgraded to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

The Zacks Consensus Estimate for the stock moved higher in the last 30 days after the company revised its net sales and earnings guidance range for the first quarter of fiscal 2018 on Jun 5. The revised guidance depicts an improvement from the earlier projection at the mid-point.

The company now expects net sales for the quarter to witness year-over-year growth in the range of 4.5% to 6% (mid-point 5.25%). The previous expected growth rate was 2%-7% (mid-point 4.5%). The revised guidance is higher at the mid-point.

Similarly, GAAP and non-GAAP earnings per share are now anticipated to be in the range of 62-64 cents and $1.22-$1.26, respectively. Earlier, the company had expected GAAP earnings to come in the band of 59 cents to 64 cents while non-GAAP earnings were expected between $1.17 and $1.27.

Microchip revealed that its performance has been better than expected in the first two months of the June quarter. This led it to revise the first quarter revenue and earnings outlook.

The Zacks Consensus Estimate for fiscal 2018 has increased 0.9% to $4.62 over the last 30 days. For fiscal 2019, the consensus estimate is currently pegged at $4.97, up 2.3% over the same time frame.

We also note that shares of the company have outperformed the S&P 500 on a year-to-date basis. While the index gained 10.5%, the stock returned 26.4%.

Growth Catalysts

Microchip is one of the better-positioned companies in the semiconductor industry based on its product strength. Microchip is evidently benefiting from the addition of Atmel's product portfolio, which it acquired in Apr 2016.

Going ahead, we believe the launch of new products like eXtreme Low Power (XLP) PIC32MM microcontroller, PIC32MX1/2 XLP, PIC32MZ DA microcontroller (MCU) family and the PIC16F19197 family (low power MCUs) will add to its customer base. The newly added Wi-Fi Software Development Kit (SDK) with Apple HomeKit support further expands the product portfolio.

Moreover, the company's market penetration is quite high, evident from its net sales growth of 58.8% year on year in fiscal fourth-quarter 2017. Notably, the frequent launch of new products and updates to its existing portfolio provides Microchip a competitive edge.

Microchip Technology Incorporated Revenue (TTM)

Microchip Technology Incorporated Revenue (TTM) | Microchip Technology Incorporated Quote

Key Picks

Other stocks that can be considered by investors are Applied Optoelectronics, Inc. AAOI , and Applied Materials, Inc. AMAT and Arista Networks, Inc. ANET , all three sporting a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

The long-term earnings growth rates for Applied Optoelectronics, Applied Materials and Arista Networks are projected to be 20%, 16.6% and 20.4%, respectively.

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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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