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Microchip Technology Stock Valuation – May 2015 Quarterly Update $MCHP

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 the 5 Most Undervalued Companies for the Defensive Investor – May 2015.  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 Microchip Technology stock analysis showing a specific look at how Microchip Technology (MCHP) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Microchip Technology Incorporation develops, manufactures and sells specialized semiconductor products used by customers for embedded control applications. The Company’s product portfolio comprises general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, a spectrum of high-performance linear, mixed-signal, power management, thermal management, RF, safety, security, wired connectivity and wireless connectivity devices, as well as serial EEPROMs, Serial Flash memories, Parallel Flash memories and serial SRAM memories. The Company licenses Flash-IP solutions that are incorporated in a range of products. The Company’s synergistic product portfolio targets applications in the automotive, communications, computing, consumer and industrial control markets. The Company’s products include microcontrollers, development tools, analog, interface and mixed signal products, memory products and technology licensing.
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 = 4/5

  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 - FAIL

Valuation Summary

Key Data:

Recent Price $49.13
MG Value $11.21
MG Opinion Overvalued
Value Based on 3% Growth $22.08
Value Based on 0% Growth $12.94
Market Implied Growth Rate 11.88%
Net Current Asset Value (NCAV) -$0.32
PEmg 32.27
Current Ratio 7.53
PB Ratio 5.31

Balance Sheet – March 2015

Current Assets $2,665,000,000
Current Liabilities $354,000,000
Total Debt $1,827,000,000
Total Assets $4,781,000,000
Intangible Assets $1,076,000,000
Total Liabilities $2,736,000,000
Outstanding Shares 220,900,000

Earnings Per Share

2015 $1.65
2014 $1.82
2013 $0.62
2012 $1.65
2011 $2.15
2010 $1.16
2009 $1.31
2008 $1.40
2007 $1.62
2006 $1.13
2005 $1.01

Earnings Per Share – ModernGraham

2015 $1.52
2014 $1.47
2013 $1.32
2012 $1.62
2011 $1.58
2010 $1.31

Dividend History
MCHP Dividend Chart

MCHP Dividend data by YCharts

Conclusion:

As this Microchip Technology stock analysis shows, Microchip Technology is suitable for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor is concerned by the insufficient earnings growth over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor is only concerned with the lack of earnings growth over the last five years.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities.  From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.58 in 2011 to only $1.52 for 2015.  This level of demonstrated growth does not support the market’s implied estimate of 11.88% annual earnings growth over the next 7-10 years and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the 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 (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.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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