Will Microchip Technology Miss Earnings Estimates in Q3? - Analyst Blog

Chipmaker Microchip Technology Inc. (MCHP) is to report second-quarter fiscal 2015 results on Oct 30. Last quarter, the company failed to spring any surprise as earnings were in line with the Zacks Consensus Estimate. It is worth noting that Microchip has outperformed the Zacks Consensus Estimate in three of the four preceding quarters, with a positive earnings surprise average of 4.3%.

Let's see how things are shaping up for this announcement.

Factors at Play This Quarter

Earlier this month, Microchip revised its revenue forecast downward for the quarter, citing feeble chip demand from China in September as the primary drag. Its sales for the quarter are now projected to come at around $546 million, down roughly 3.9% from the average of the earlier forecast range of $560 million–$575.9 million. (Read: Microchip Inventory, China Comments Send Chip Stocks Down). September has traditionally been a strong month for the company, and weak demand will put pressure on top and bottom line figures.

Late in the quarter, Microchip's efforts to establish a foothold in the “Internet of Things” by acquiring British semiconductor company CSR plc failed, as the latter rejected the company's bid.

Some developments in the quarter that could favorably impact Microchip's quarterly results include the purchase of an 83.5% stake in ISSC Technologies Corporation, a developer of wireless solutions, and the closing of the Standard Microsystems acquisition. These deals are expected to expand Microchip's addressable markets and boost revenues. Microchip expects the Standard Microsystems buyout to be accretive to earnings by roughly 3 cents for the September-ending quarter.

Furthermore, Microchip continues to expand its product portfolio by developing a broad range of innovative and proprietary new products, such as launching its new PIC32 Bluetooth Starter Kit and expanding its range of ultra-high data rate WLANs. These product launches are expected to enhance the top line.

Microchip has also been witnessing negative earnings estimate revisions of late. The Zacks Consensus Estimate for the current quarter has declined 3% over the past month to 64 cents, while that of fiscal year 2015 fell 3.5% to $2.49 over the same time frame.

Earnings Whispers?

Our proven model does not conclusively show that Microchip Technology will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here as you will see below.

Negative Zacks ESP: Microchip Technology has an Earnings ESP of -3.13%. This is because the Most Accurate estimate stands at 62 cents while the Zacks Consensus Estimate is pegged higher at 64 cents.

Zacks Rank: Microchip Technology has a Zacks Rank #4 (Sell), which when combined with a negative ESP makes surprise prediction difficult.

We caution particularly against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) when going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some companies that are about to report which you may consider instead, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Kennedy-Wilson Holdings, Inc. (KW) has an earnings ESP of +35.00% and a Zacks Rank #1 (Strong Buy).

JAVELIN Mortgage Investment Corp. (JMI) has an earnings ESP of +8.89% and a Zacks Rank #1.

Gentherm Inc. (THRM) has an Earnings ESP of +4.65% and a Zacks Rank #1.

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