Microchip Technology Inc Valuation – January 2016 Update $MCHP

Benjamin 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 10 Most Undervalued Companies for the Defensive Investor – November 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 stock analysis showing 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, manufactures and sells specialized semiconductor products for a range of embedded control applications. The Company operates in segments, including semiconductor products and technology licensing. The Company’s product portfolio consists of general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers; linear, mixed-signal, power management; thermal management; Radio-frequency (RF), safety, security, wired connectivity and wireless connectivity devices, as well as serial EEPROMs, Serial Flash memories, Parallel Flash memories and serial Static Random Access Memory (SRAM). The Company also licenses Flash-IP solutions that are incorporated in a range of products. The Company’s products are applicable in the automotive, communications, computing, consumer and industrial control markets.


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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.


Downloadable PDF version of this valuation:

ModernGraham Valuation of MCHP

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $8,762,697,011 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 7.47 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 29.79% Fail
6. Moderate PEmg Ratio PEmg < 20 25.21 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 4.40 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 7.47 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.12 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MCHP value chart January 2016

EPSmg $1.71
MG Growth Estimate 0.83%
MG Value $17.41
Opinion Overvalued
MG Value based on 3% Growth $24.84
MG Value based on 0% Growth $14.56
Market Implied Growth Rate 8.36%
Current Price $43.20
% of Intrinsic Value 248.09%

Microchip Technology Inc qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the insufficient earnings growth over the last ten years along with the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $1.62 in 2012 to an estimated $1.71 for 2016.  This level of demonstrated earnings growth does not support the market’s implied estimate of 8.36% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value 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 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.

Stage 3: Information for Further Research

MCHP charts January 2016

Net Current Asset Value (NCAV) -$4.04
Graham Number $22.53
PEmg 25.21
Current Ratio 7.47
PB Ratio 4.40
Dividend Yield 3.31%
Number of Consecutive Years of Dividend Growth 14



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Most Recent Balance Sheet Figures

Balance Sheet Information Sep15
Total Current Assets $2,778,887,000
Total Current Liabilities $371,776,000
Long-Term Debt $2,687,874,000
Total Assets $5,786,309,000
Intangible Assets $1,711,103,000
Total Liabilities $3,656,928,000
Shares Outstanding (Diluted Average) 217,099,000

Earnings Per Share History

Next Fiscal Year Estimate $2.15
Mar15 $1.65
Mar14 $1.82
Mar13 $0.62
Mar12 $1.65
Mar11 $2.15
Mar10 $1.16
Mar09 $1.31
Mar08 $1.40
Mar07 $1.62
Mar06 $1.13
Mar05 $1.01
Mar04 $0.65
Mar03 $0.42
Mar02 $0.45
Mar01 $0.70
Mar00 $0.59
Mar99 $0.24
Mar98 $0.31
Mar97 $0.28
Mar96 $0.23

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $1.71
Mar15 $1.52
Mar14 $1.47
Mar13 $1.32
Mar12 $1.62
Mar11 $1.58
Mar10 $1.31
Mar09 $1.35
Mar08 $1.30
Mar07 $1.16
Mar06 $0.86
Mar05 $0.70
Mar04 $0.55
Mar03 $0.49
Mar02 $0.51
Mar01 $0.50
Mar00 $0.37

Recommended Reading:

Other ModernGraham posts about the company

Microchip Technology Inc. Analysis – September 2015 Update $MCHP
Microchip Technology Stock Valuation – May 2015 Quarterly Update $MCHP
34 Companies in the Spotlight This Week – 2/7/15
Microchip Technology Inc. Quarterly Valuation – January 2015 $MCHP
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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.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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