Friday, October 10, 2014

Microchip Tanks on Preliminary Q3 2014 results

Microchip issued a press release today:


It is not pretty, but I believe the market over-reacted.

First, second quarter fiscal 2015 for Microchip ended September 30, so it is Q3 2014 for the rest of us.

Second, it was a bad quarter only in respect to prior guidance. Microchip has been on a tear this year, and guided to $560.0 million to $575.9 million for revenue.

The preliminary revenue estimate  $546.2 million, which is well below the low end of guidance. But it is up from $492.7 million year-earlier. That is a nearly 11% y/y increase. Part of that increase is from the ISSC acquisition, but even excluding ISSC revenue is $529.3 million, which is up over 7% y/y.

What does it mean? Does this bode ill for the future?

Of course it is hard to say. Microsoft sells microcontrollers and analog chips to a very large number of customers. On a regional basis the demand was worst, compared to expectations, in China. Is there a problem in the Chinese domestic market, or a problem with end demand in Europe or the United States? Or are manufacturers just being cautious? For now, I am leaning to the just being cautious camp, because I believe Europe and China will rebound sooner rather than later. But I could be wrong.

I may even be more optimistic than Steve Sanhi, Microchip's CEO, who stated "We
believe that another industry correction has begun and that this correction will be seen more broadly across the industry in the near future.”

Rather, my guess is any problems are device specific. End markets for microcontrollers include automobiles, medical and industrial equipment. Maybe the sanctions against Russia a backfiring to hit U.S. investors.

After closing yesterday at $45.54, Microchip dropped as low as $39.02 today, but as I write it has recovered to $40.57. Microchip is a strong cash generator and pays a dividend that amounts to over 3.1% at the price I just quoted. It last paid the dividend on September 4.

Microchip has a trailing P/E ratio of 24.7, which is quite reasonable even taking into account the newly announced, slower annual growth rate.

I don't like it when a stock I own goes down, or misses guidance, but Microchip has a great long-term track record, so I see no point to selling my holdings. It will be interesting to see if the bulk of the semiconductor industry is seeing the same pain, or if it is specific to Microchip. It is very possible that demand in Q4 will make up for any slack in demand in Q3.

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