Friday, June 5, 2009

Microchip Looks for Market Share

Microchip (MCHP) specializes in microcontrollers and related semiconductor integrated circuits (ICs). Microcontrollers typically integrate a computer and memory with the ability to output control signals and receive input signals. They are truly ubiquitous in our era. Almost every machine made, from household thermostats to cell phones and automobiles, contains one or more microcontrollers.

There is plenty of competition for microcontroller sales. Because they go into such a large variety of machines, many designs are possible and the market is still fragmented. However, Microchip has the largest market share in the largest market segment, 8-bit microcontrollers. There are also 16-bit and 32-bit microcontrollers, which tend to incorporate more powerful computers (a 16 bit data path is twice as wide as an 8-bit path).

Microchip has thousands of firms that buy its chips and incorporate them into products for end markets like telecommunication, industrial equipment, and consumer items. Because of this, when end market demand is broadly down, there is no way for Microchip to avoid slump in its sales.

If you take a historical view of Microchip, however, you see a corporate culture that drives success. Over time, on the whole, Microchip tends to gain market share. It does this by focusing on customer needs.

So how is Microchip doing right now, and how will the future play out? The results for the fourth quarter of fiscal 2009, or the first calendar quarter of 2009, looked pretty grim at first glance. Revenues of $173.3 million were down 10% from the previous quarter and down 33% from the year-earlier quarter. Net income on a GAAP basis fell to $23 million, down from $73 million in the December quarter and from $77 million in the year-earlier quarter.

One point to notice: even at these low levels of production, Microchip turned a profit. And they continued to pay a remarkably high dividend. Microchip has consistently returned profits to shareholders through dividends. There may be scenarios where they would have to cut the dividend, but cash flow is covering most of the dividend payments even now. They also have a cash balance of $1.4 billion.

They say, and it appears to be true, that they are making money in this market even as most of their competitors are losing money. In a way it might be better for Microchip, in the long run, if the recession is long and deep enough to force some consolidation in microcontrollers.

Microchip will be dependent on an uptick in overall global consumption to start back towards previous record revenues and profits. But in the meantime they are winning plenty of placement in customers new products, as well as bringing out new products themselves. Notable is their touch-sense input business, which has grown through both an acquisition and internal development.

Dismal as the quarter was, the end of the quarter showed something of an uptick. They even cancelled a scheduled shutdown of their Thailand plant to deal with the resumption in demand. A notable source of demand is in the Chinese telecommunications market.

Buy Microchip at the current price, $21.67 per share, and you get a dividend of 6.13%. That is hard to beat.

I own Microchip stock.

Keep diversified!

More data:
My Microchip Analyst Conference Summary page

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