Microchip, Housing, and Semiconductor Demand

Microchip (MCHP) reported Q2 revenues last Tuesday that were down from April guidance but slightly better than they had warned about in June. Revenues were $264.1 million, up 2.3% sequentially from $258.2 million and up 0.6% from $262.6 million year-earlier. That is not exactly high-growth but it is better than many semiconductor companies reported, notably Motorola (MOT).

The slump in the semiconductor chip industry, which appeared to have have hit bottom for most companies in Q1, was mainly caused by inventory restructuring at end customers and distributors. Given that, while unit shipments increased in many cases, pricing was weak and the result were drops in revenues. Of course the semiconductor industry is complex. Many companies reported weak demand for telecommunication infrastructure chips as a result of industry consolidation. Motorola also lost market share in the low-end of the cell phone market to Nokia.

Microchip had predicted a 5% sequential rise in revenues. At their analyst conference (See my summary) they accounted for their 2.7% miss of that prediction partly because of the housing industry slump. You might think that houses don't have microcontrollers and other semiconductor chips in them, but you would be wrong. Microchip supplies parts that go into five things that can go into new home construction: garage door openers, security systems, thermostats, irrigation equipment, and airconditioning. Yet despite the rather broad slump in the housing market, this did not cause Microchip revenues to fall; instead they failed to grow as quickly as expected by about 1%. It's stock price has held up well because it pays a hefty dividend and has good profit margins even in weak periods.

Slow housing construction hits specific industries like lumber and concrete pretty hard, but many economic sectors are only affected by a drop in housing construction if that is accompanied by lower consumer demand. In addition, most U.S. semiconductor companies do more than half their sales outside the U.S.

Microchip's management, humbled by missing guidance, now only expects revenues to be flat to up 2% in Q3. Usually demand in Europe is slow in Q3 because the whole subcontinent goes on those nice vacations only the elite are allowed in the U.S. But Q3 is when Asian manufacturers have to gear up for Q4 sales in the U.S., and while demand in India & China is not quite as seasonal, it is growing rapidly.

While not wanting to minimize the pain of individuals who took out adjustable rate mortgages, or became the ultimate owners of those mortgages, after the Federal Reserve had (belatedly) started raising interest rates, I don't think that particular situation says much about the economy at present. Housing demand always returns when prices get low enough to entice cautious people back into buying. Some paper profits will dissappear, but very little actual money will be lost on net by anyone.

It is just one more reminder that if you can, buy at the bottom of the cycle when others are panicking. Don't be the greater fool. Refrain from buying when prices lose touch with reality.

Note: I own Microchip stock

More data: Microchip investor relations page