We continue to see Microchip Technology, Inc. (MCHP) well-positioned in its core microcontroller market for several reasons. First, the company continues to be a leading player in the 8-bit microcontroller space. Moreover, the company is targeting the high-performance 16-bit microcontroller market and demand is reflecting strong momentum.

Meanwhile, in the fourth quarter of fiscal 2008, the company reported revenues of $260.4 million, which were up 0.8% year over year and higher than our estimate of $255 million. GAAP EPS of $0.40 came in above the updated guidance of $0.36-$0.38 (previously $0.35-$0.38), easily beating consensus estimate of $0.37, namely due to a one-time tax advantage.

However, Microchip competes against significantly larger companies with greater financial resources. New market entrants are also increasingly targeting embedded control applications, which could negatively impact the company's financial performance in the future. The company faces the risk of a slowdown in the U.S. housing market. Thus, we maintain our Hold rating on the shares.

Given the recent management guidance, we now expect the company to earn $1.75 per share for FY 2009, down from our earlier estimate of $1.81 (pro-forma, excluding stock-based compensation. GAAP EPS (E) including stock-based compensation now stands at $1.67). Our target price currently stands at $34, which has been derived by applying a P/E multiple of 19.4x to our fiscal 2009 EPS estimate.