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Microchip Technology (MCHP): Safe Payout While Inventory Corrects

 November 27, 2012 09:28 AM

(By Kevin Donovan) Microchip Technology's (MCHP) challenges are as straightforward as its name: weak global economic growth is hurting final demand for its microcontrollers and signal controllers, so it's pulling in its horns.  But we think that outlook is already baked into the stock, which offers a safe, generous dividend while waiting for growth to resume.  We're buyers at current levels.

Microchip Technology's dividend yield is a healthy 4.74% after the share price recently hit a new 52-week low.  The catalyst for the downdraft was management's cautious outlook, which led the company to cut wafer starts through June as it works through an inventory correction.  Should conditions improve, Microchip says it is ready to ramp up production sooner.

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For now, though, prudence prevails.  Specifically, CEO Steve Sanghi said the looming "fiscal cliff" and weak global economic growth has resulted in a demand slump.

"Meanwhile, lots and lots of our small customers are strapped with credit and living hand to mouth and not launching their products and taking lower revenue and seeing economic contraction, and all those things are continuing," Sanghi said in a conference call with investors after reporting September quarter results.

But if you believe as we do that easy monetary policy will continue apace and that a divided U.S. government will embrace compromise, growth will likely resume sooner rather than later.

In the interim, Microchip's shareholder-friendly dividend policy offers a compelling story for income investors.   The latest quarter marked the 41st consecutive quarter of paying a dividend, and during that streak the dividend has never been reduced.  Cash generation is currently robust enough to keep that streak alive, with the company expecting net cash generation during the December quarter of approximately $80 million to $100 million.  In the latest quarter, Microchip declared a dividend totaling $68.5 million.

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Also comforting to income investors is the solid balance sheet.  The company sports a current ratio of 7.03 and debt-to-equity ratio of 0.49.

In the latest quarter, Microchip reported non-GAAP earnings of $0.39 per share, missing the consensus estimate of $0.44 as shrinking margins hurt results.  Gross margin was 57.7% compared with 59% in the previous quarter.  Significantly, inventory swelled to $289.5 million, up from $221.5 million at the end of the previous quarter.  For the December quarter, the company expects EPS of $0.37-0.41 and a gross margin of 56-58%.

On the valuation front, Microchip Technology trades at 14.49 times next year's consensus earnings estimate, compared with 13.25 for the S&P 500.  We see PE multiple expansion as the economy picks up steam.

In the last 52 weeks, Microchip Technology has traded between $28.58 and $37.56.  Year to date the share price is down 15.4%.

Microchip Technology, Inc., based in Chandler, Ariz., develops and manufactures specialized semiconductor products.  Its product portfolio comprises 8-bit, 16-bit, and 32-bit PIC microcontrollers and 16-bit dsPIC digital signal controllers, which feature on-board Flash (reprogrammable) memory technology.
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