Microchip Technology's Path To Recovery: Analyst Sees Steady Margins With Ongoing Inventory Management

Piper Sandler analyst Harsh V. Kumar reiterated a Neutral rating on Microchip Technology Inc MCHP with a price target of $80 on April 26.

The re-rating reflected the timing of a potential macro recovery.

Kumar noted that the company is continuing the inventory-clearing process and positioning itself for a recovery in the second half of the year for most of its business. 

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Specifically, inventory clearances are progressing in the auto and industrial industries, and management is seeing green shoots in these markets. 

The analyst noted that management intends to significantly undership demand at this time in order to reduce inventory across its channels. According to comments made within the quarter, MCHP still anticipates revenue to remain roughly flat as they enter the guidance for the second calendar quarter.

The inventory recovery, coupled with the operating expenditure actions, positions MCHP's model to benefit when demand trends swing up post-inventory clearances, according to Kumar. On the gross margin side, the company is adjusting its utilization accordingly due to the magnitude and sharpness of the downturn.

Kumar said that in the longer term, the company remains steadfast in aspiring to reach 68% gross margin levels along with 45% operating margins. The current margin levels are artificially low due to the current cycle, and the company is set to achieve increased leverage, as per the analyst. He said that margin recovery should be driven by mix and utilization improvements as revenue growth resumes.

 The analyst highlighted that despite the downtrend in the business and demand outlook, Microchip is continuing to keep capex for the overall business at historical levels. Additionally, per media reports, the company has also won ~$162 million in a grant through the CHIPS Act. Kumar noted that this capex spend will position MCHP well for the next business cycle after the inventory recovery. 

Kumar projected fourth-quarter revenue and EPS of $1.33 billion and $0.57.

Microchip Technology stock gained over 24% in the last 12 months. Investors can gain exposure to the stock via Columbia ETF Trust I Columbia Seligman Semiconductor And Technology ETF SEMI and First Trust Nasdaq Semiconductor ETF FTXL.

Price Action: MCHP shares are down 0.16% at $93.45 premarket at the last check Monday.

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