Microchip's Outlook Is Registering

The embedded specialty chip maker's optimism could bode well for the economy.

Author:: Kristen French
Publish date:: Apr 9, 2002 3:13 PM EDT

Updated from 11:12 a.m. EDT

Orders are finally picking up for chipmaker

Microchip Technology

, which modestly raised its earnings and revenue guidance for the fourth and first quarters Monday.

After a slow 2002, the uptick in business may mark a turnaround for Microchip and the rest of the semiconductor industry, analysts said.

For the first time in six quarters, the embedded specialized chipmaker received more new orders than it shipped. On expectations of strong demand for its proprietary products, Microchip hiked its earnings estimates by a penny to 19 cents a share for the fourth quarter ended March 31, and to 21 cents a share in the June quarter. On average, analysts were expecting 18 cents a share for both quarters.

Expecting Surprises

In a note published Tuesday morning, Morgan Stanley analyst Mark Edelstone, who said he "believes additional positive surprises are likely," raised his price target on the company to $55 from $52 and hiked his stock rating to overweight from equal weight. He also lifted his earnings estimates slightly for fiscal 2003 to 95 cents a share and for 2004 to $1.25 a share. Shares of Microchip were lately rising 7.5% to $44.45.

"When Microchip's strength in the March quarter is combined with the fact that the June and September quarters are normally the strongest of the year for the company, we believe the recent strength in demand for the company's products is a strong signal for a meaningful improvement in near-term fundamentals," wrote Edelstone.

Microchip said bookings were up close to 35% from the third quarter, and that it will need fewer turns orders, or orders that are booked and billed in the same quarter, to reach its revenue targets in the June quarter. "We believe this improvement marks a turning point for Microchip," wrote CEO Steve Sanghi in a statement.

The company also expects to increase its capacity utilization in the June quarter to 70% from 60%. "Increased capacity utilization should lead to incrementally higher gross margins due to better fixed-cost absorption," wrote Edelstone.

The company's long-term growth prospects are around 20%-25%, whereas the industry's is likely to fall to 10% long-term from historical levels around 17%, according to Peacock Hislop Staley & Given analyst Joe Blankenship.

Leverage

With its broad end-market reach, it is also more economically sensitive that other chipmakers, and so should be the "first to enjoy a return to record earning results," Edelstone wrote.

Still, a pickup at Microchip is a good sign for the rest of the sector, said Prudential analyst Hans Mosesmann.

"The end markets this company addresses are more mature, like the automotive industry, the medical industry and the government, where there's not usually a huge inventory glut, where things didn't get out of hand, so it tends to be good predictor of improvement in economic activity worldwide and the rest of the sector," said Mosesmann. "If we're starting to see demand in areas that are more mature, that are very diversified and fragmented, maybe there is hope for an upgrade cycle in relation to PCs later this year."

Edelstone too sees an improving picture for the entire industry, saying a stronger economy, and increasing margins should drive the average industry stock higher in the next 12 to 18 months.