Microchip Technology Is Attractive
The wide-moat firm's post-earnings sell-off tied to near-term revenue deceleration is providing an attractive entry point for long-term investors.
We continue to see an attractive margin of safety for investors in wide-moat Microchip Technology (MCHP), thanks to both the U.S. stock market correction in early February and a post-earnings sell-off associated with near-term revenue growth deceleration. We still view the sales growth deceleration as quite normal, in light of looming tough comparisons after a stellar calendar 2017 for Microchip and its peer group, and we can justify our valuation even if the firm were to fall modestly short from its long-term organic midcycle revenue growth target of 7%-9%. We think Microchip has an exemplary management team, and the firm has been especially wise on the M&A front, while we see the potential for additional deals on the horizon. We also maintain our wide moat rating for Microchip, thanks to high customer switching costs for its products and intangible assets based on decades of chip design and manufacturing expertise. With shares trading in the mid-$80 range and dipping even as low as $78 earlier this month, we view shares as attractively valued relative to our unchanged $97 fair value estimate.
Microchip will host an Investor Day on Thursday and we wouldn’t be surprised if the company were to update its long-term financial targets at the event. Microchip’s existing long-term adjusted operating margin target of 40% is clearly within reach, as higher sales levels and synergies from recent acquisitions of Atmel and Micrel have lifted adjusted operating margins from the low 30% range to 39% in the December quarter. We still model some modest operating leverage from here to the 42% range by fiscal 2022. We are also not purely counting on revenue growth for such leverage, as our midcycle revenue forecasts call for 6% organic growth, slightly short of the firm’s target.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Brian Colello does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.