Microchip Technology Inc. (MCHP) Quarterly Valuation – April 2014

MicrochipTechnology_LogoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Defensive Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Microchip Technology Inc. (MCHP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Microchip Technology Incorporated develops and manufactures specialized semiconductor products used by its customers for a variety of embedded control applications. The Company’s portfolio consists of specialized 8-bit, 16-bit, and 32-bit PIC microcontrollers and 16-bit dsPIC digital signal controllers, which feature on-board Flash (reprogrammable) memory technology. In addition, the Company offers a broad spectrum of high-performance linear, mixed-signal, power management, thermal management, RF, safety and security, and interface devices, as well as serial EEPROMs, Serial Flash memories and Parallel Flash memories. The Company also licenses Flash-IP solutions that are incorporated in a broad range of products. In November 2013, Microchip Technology Inc announced the acquisition of EqcoLogic. In April 2014, Microchip Technology Inc acquired Supertex Inc.

MCHP Chart

MCHP data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $47.33
MG Value $23.90
MG Opinion Overvalued
Value Based on 3% Growth $23.14
Value Based on 0% Growth $13.57
Market Implied Growth Rate 10.58%
Net Current Asset Value (NCAV) $0.21
PEmg 29.66
Current Ratio 6.22
PB Ratio 4.54

Balance Sheet – 12/31/2013

Current Assets $1,969,000,000
Current Liabilities $316,400,000
Total Debt $1,005,300,000
Total Assets $4,003,100,000
Intangible Assets $742,200,000
Total Liabilities $1,928,000,000
Outstanding Shares 199,120,000

Earnings Per Share

2014 (estimate) $2.19
2013 $0.62
2012 $1.65
2011 $2.20
2010 $1.16
2009 $1.33
2008 $1.40
2007 $1.62
2006 $1.13
2005 $1.01
2004 $0.65

Earnings Per Share – ModernGraham

2014 (estimate) $1.60
2013 $1.33
2012 $1.64
2011 $1.60
2010 $1.31
2009 $1.36

Dividend History

MCHP Dividend Chart

MCHP Dividend data by YCharts


Microchip Technology qualifies for the Enterprising Investor but not the Defensive Investor.  For the Defensive Investor, the company has shown insufficient earnings growth in the ten year historical period and trades at high PEmg and PB ratios.  However, the company passes all 5 of the Enterprising Investor’s requirements.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research into a company and its competitors including a review of ModernGraham’s valuation of Analog Devices, Inc. (ADI) and ModernGraham’s valuation of Texas Instruments (TXN).  From a valuation perspective, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.31 in 2010 to only an estimated $1.60 for 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 10.58% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Microchip Technology Inc. (MCHP)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Microchip Technology Inc. (MCHP) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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