Tuesday, May 1, 2007

Microchip (MCHP) Keeps Chugging Along

I bought Microchip (MCHP) on a dip after long being aware of the company. At this moment it seems fairly priced at $40.22 per share, which gives it a past P/E ratio of 27 and a dividend yield of 2.7%. You don't too often see stocks with both dividend yields and PE ratios that high; it is a company worth examining.

You can get a lot of insight from my summaries of MCHP quarterly results reports and analyst conferences over the last year. Openicon has summaries of analyst conferences for many leading technology companies.

I first became aware of Microchip when I decided to do some self-education about microcontrollers (a big part of me wishes I had studied engineering rather than liberal arts). I bought something called a BASIC Stamp kit from Parallax. I had great fun making LEDs and even regular light bulbs blink on and off to simple computer programs I wrote. That same technology today is ubiquitous in electronic devices and appliances. They almost all have at least one microcontroller, which is a tiny computer-on-a-chip with circuits that can read data from sensors and control external circuits. The chip at the heart of the BASIC Stamp was made by Microchip. From hobbyist and professional magazines I learned its PIC series of microcontrollers were very popular. But the stock had a higher PE ratio than I liked, so I put it on the back burner.

There is a lot of competition in the microcontroller field, as well as in other areas where Microchip competes, like analog circuits. Atmel is an example; their quarterly results and analyst conference will be held later today (See my ATML page). Freescale, Texas Instruments, Phillips and many others make microcontrollers, DSPs, embedded microprocessors, and related devices. Competition can be ruinous; high PEs need serious justification.

In mid-to-late 2006 the semiconductor industry and its analysts were pretty gloomy. First revenues started coming in below prior guidance. It was an inventory correction, we were told. Final demand was not really that bad. But with economic outlooks for 2007 cautious, especially in the United States, no one wanted large inventories of either finished electronics products or the parts needed to make more. In addition computer software enabled inventories to be managed better, and in many cases middlemen were eliminated. The semiconductor chip makers themselves had ramped up inventory in 2005; suddenly they seemed to have too much in 2006.

Microchip was subjected to this adjustment along with other chip makers, though to a lesser degree. Microchip's revenues rose more slowly than usual in Q2 and Q3 of 2006. They fell sequentially (but were up 7% over year-earlier) in Q4. I asked whether this was a one-timer or a major trend. It did not look as if anyone was taking a noticable amount of market share from Microchip, and there is that nice dividend, so I held my shares.

Q1 revenues were up and guidance for Q2 is moderately strong. Hence the recent climb in stock price. More important, Microchip's designs have been adapted at a faster rate than their competitors. This was confirmed by recently released independent data showing the Microchip was number 1 in market share for 8-bit microcontrollers.

I like MCHP's management. They aren't afraid to say that they have good products, but they don't seem to be interested in hyping investors. You can see they are long term planners in the way they design and market chips. It is also visible in their cash management strategy. They generate a lot of cash. They prefer to return it to shareholders through dividends instead of stock buy-backs. Since their stock is not cheap, that makes sense. It favors longer-term investors who like steadily increasing dividends over short-termers who just want to cash out.

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