Will Microchip (MCHP) Beat Q3 Earnings on Organic Growth? - Analyst Blog

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Leading semiconductor manufacturer Microchip Technology Inc.MCHP is scheduled to report its fourth-quarter fiscal 2015 results after the closing bell on May 7. In the last reported quarter, Microchip's adjusted earnings comfortably beat the Zacks Consensus Estimate by 4 cents on broad-based product growth. Let's see how things are shaping up for this announcement.

Key Factors in the Fourth Quarter

In February this year, Microchip sold $1.5 billion worth convertible senior subordinated notes due 2025 to increase its liquidity and reduce its debt burden. The transaction resulted in net proceeds of $1.47 billion, part of which were utilized to repurchase $575 million in principal amount of convertible junior subordinated debentures due 2037. Microchip used the remainder of the proceeds to repay debt under its credit facility.

The repurchase of the convertible junior subordinated debentures is expected to provide higher earnings per share benefit compared to the increase in interest expense from the refinancing transactions. Microchip expects its share count to reduce by approximately 10.5 million to 11 million shares on a quarterly basis.

Consequently, the company revised its earnings guidance for fourth-quarter fiscal 2015. Non-GAAP earnings are currently anticipated to be within 66 cents to 68 cents per share compared with the earlier expected range of 65 cents to 67 cents.

Microchip expects to generate approximately $160 million cash in the fourth quarter prior to the dividend payment and acquisitions. The company expects to incur $40 million in capital expenditure in the fourth quarter, bringing its tally to about $160 million for fiscal 2015.

Microchip is one of the fastest growing providers of 16-bit and 32-bit microcontrollers in the world. The microcontroller business of the company continued to outperform the industry and enabled it to gain significant market share.

Microchip expects to continue this momentum and strengthen its position as the best-performing microcontroller franchise in the industry. The company is increasingly expanding its touch business beyond handsets and tablets in areas, such as automotive industrial applications.

The Analog business has also become one of the largest analog franchises in the market. In order to further capitalize on this burgeoning business potential, Microchip is developing and introducing a wide range of innovative and proprietary new products. In addition, with a diligent focus on right-sizing the various components of inventory holdings, Microchip has been able to reduce its inventory.

Earnings Whispers

Despite healthy bookings on the back of strong demand and robust product designs, our proven model does not conclusively show that Microchip is likely to beat earnings this quarter as it lacks the key ingredients for a success recipe.

Zacks ESP: Expected Surprise Prediction or Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This indicates a likely in-line earnings for the shares.

Zacks Rank: Microchip's Zacks Rank #3 (Hold) combined with a 0.00% ESP reduces the predictive power of ESP. Note that stocks with a Zacks Ranks of #1 (Strong Buy), #2 (Buy) and #3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Sunoco LP Common Units SUN , earnings ESP of +1.59% and a Zacks Rank #2.

Intrawest Resorts Holdings, Inc. SNOW , earnings ESP of +2.17% and a Zacks Rank #2.

TC PipeLines, LP TCP , earnings ESP of +10.67% and 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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