Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – May 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is aÂ Microchip TechnologyÂ stock analysis showing a specific look at how Microchip Technology (MCHP)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Microchip Technology Incorporation develops, manufactures and sells specialized semiconductor products used by customers for embedded control applications. The Companyâ€™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 Companyâ€™s synergistic product portfolio targets applications in the automotive, communications, computing, consumer and industrial control markets. The Companyâ€™s products include microcontrollers, development tools, analog, interface and mixed signal products, memory products and technology licensing.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â PASS
- 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 -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- 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
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|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|
Balance Sheet – MarchÂ 2015
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
As this Microchip TechnologyÂ stock analysis shows, Microchip TechnologyÂ is suitableÂ for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor is concerned by the insufficientÂ earnings growthÂ over the last ten years, and the high PEmg and PB ratios.Â The Enterprising Investor is only concerned withÂ the lack of earnings growth over the last five years. Â As a result, all Enterprising InvestorsÂ 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. Â From a valuation side of things,Â the company appears to be overvalued after seeingÂ its EPSmg (normalized earnings) drop from $1.58 in 2011 to onlyÂ $1.52Â for 2015. Â This level of demonstrated growth does not supportÂ the market’s implied estimate of 11.88% annual earnings growth over the next 7-10 years and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well belowÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Microchip Technology (MCHP)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â 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. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.