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Will Microchip's (MCHP) Earnings Momentum Continue in Q4?

Supriyo Bose
Updated

Leading semiconductor manufacturer Microchip Technology Inc. MCHP is scheduled to report fourth-quarter fiscal 2016 results after the closing bell on May 4. In the last reported quarter, Microchip’s adjusted earnings beat the Zacks Consensus Estimate by six cents.

The company has beaten earnings estimates in each of the last four quarters with an average positive earnings surprise of 5.20%. Let’s see how things are shaping up for this announcement.



Key Factors in the Fourth Quarter

Microchip recently closed the acquisition of its rival Atmel Corporation. The company expects the acquisition to supplement its operational excellence and customer base. The transaction is deemed to be strategic as Atmel's microcontrollers, wireless, touch, memory and automotive products complement and enhance Microchip's corresponding solutions. Management remained confident that Atmel would yield synergistic benefits to Microchip and would be immediately accretive to its non-GAAP earnings per share.

With Atmel on board, Microchip expects revenues for the soon-to-be-reported quarter to be a record high and at the higher end of its earlier guided range of $552.0– $568.5 million. Non-GAAP earnings are also anticipated to be inclined towards the upper end of its previous expectations of 65–69 cents per share.

Microchip also collaborated with Altis Semiconductor to make its Smartbit based antifuse one-time-programmable non-volatile memory (NVM) technology available on Altis platforms. This NVM technology offers industry-leading fast-read capability and Smartbit dynamic programming for high reliability. Such innovative and proprietary new products are expected to reinforce the product portfolio and consequently augment its revenues.

Microchip is one of the fastest growing providers of 16-bit and 32-bit microcontrollers in the world. The microcontroller business of the company has historically outperformed the industry and is expected to record a solid performance in the upcoming quarter as well.

Microchip also remains bullish on the surging demand for 3D control displays in a gamut of industries ranging from home automation to IoT (Internet of Things). The company is increasingly expanding its touch business beyond handsets and tablets in areas such as automotive industrial applications.

The Analog business of Microchip 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 to further boost its operating results during the quarter.

Earnings Whispers

With a strong operating framework, our proven model conclusively shows that Microchip is likely to beat earnings this quarter as it possesses the key components. 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. This is perfectly the case here as you will see below:

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently at +3.33%.

Zacks Rank: Microchip’s Zacks Rank #2 when combined with a positive ESP makes us confident of an earnings beat. On the other hand, 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.

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:

Pattern Energy Group Inc. PEGI, earnings ESP of +466.67% and a Zacks Rank #3.

Hawaiian Electric Industries Inc. HE, earnings ESP of +2.70% and a Zacks Rank #3.

Consolidated Edison, Inc. ED, earnings ESP of +0.82% and a Zacks Rank #3.

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HAWAIIAN ELEC (HE): Free Stock Analysis Report
 
CONSOL EDISON (ED): Free Stock Analysis Report
 
MICROCHIP TECH (MCHP): Free Stock Analysis Report
 
PATTERN ENERGY (PEGI): Free Stock Analysis Report
 
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