Microchip Pays Dividends
MCHP

September 10, 2012
by William P. Meyers

Microchip (MCHP) is one of the largest global manufacturers of microcontrollers, which are semiconductor chips incorporating computers and capabilities to receive data from sensors and send control signals to motors or other external parts. For investors the company is noted for its relatively high dividend and its ability to generate profits even during down cycles.

Today Microchip stock closed at $34.14, against a 52 week high of $38.87 and low of $30.07. At that price MCHP market capitalization is $6.6 billion, and the dividend yield is 4.05%.

Last week Steve Sanghi, the CEO, reported that after sequentially up Q1 and Q2, the business environment weakened towards the end of Q2, with Europe particularly slow. The situation has not improved, so Microchip is now guiding revenues to be about flat in Q3 compared to Q2, excluding the increased revenue from the recent SMSC acquisition.

The SMSC acquisition closed August 2, at a value of $946 million. For fiscal 2012 SMSC had sales of $412 million and a non-GAAP operating margin of 12%. It will fit well with Microchip's product line, as SMSC is a specialist in smart mixed signal connectivity. Its revenues are 43% from microcontrollers and 57% analog products. These are used for automotive entertainment, wireless audio, and USB and Ethernet. Sanghi believes Microchip will be able to increase gross and operating margins of the acquisition closer to its own, high-marin model.

Microchip sells to a very diverse set of customers, including manufacturers of automobiles, household appliances, and medical and industrial equipment. Microchip also has an advanced touch screen set of solutions.

SMSC will provide a boost about 3 cents per share in the first partial quarter, then 6 to 7 cents in the first full quarter, fiscal Q3.

Steve pointed out that when Microchip bought SST it had not made a profit in five years, but has had good margins once integrated. He sees SMSC as a much less difficult business to integrate and profit from.

There is plenty of competition for microcontroller chips, but Microchip now has over 7% of the market, compared to under 2% in 1994, with the market share climb being pretty steady. In 2011 Microchip was the 4th largest player in the market after Renesas, Freescale, and TI. It is second in the 8-bit segment to Renesas, which moved ahead only when it absorbed NEC.

For fiscal Q2 2013, ending September 30, 2012, revenues are now expected between $12 and $430 million and non-GAAP EPS is expected between $0.50 and $0.52.

Given the high dividend, relatively low volatility of the stock price, and further opportunity for growth, Microchip remains a good core technology investment for long term investors. The main risk I see is macroeconomic.

Disclaimer: I have been long MCHP since 2006. I will not trade in the stock for at least one week from today.

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