Microchip Technology Notches Upgrade After Microsemi Purchase

Microchip Technology Inc. MCHP, a specialized semiconductor company, reached an agreement Thursday to acquire Microsemi Corporation MSCC, the largest supplier of military and aerospace semiconductor equipment. The deal reinforces Microchip's core strategy and justifies a bullish stance on the stock, according to SunTrust.

The Analyst

SunTrust Robinson Humphrey's William Stein upgraded Microchip Technology's stock rating from Hold to Buy with a price target boosted from $97 to $108.

The Thesis

Microchip's all-cash deal to acquire Microsemi is "structured aggressively," as it will increase its net leverage from 0.5x to 4.7x, Stein said in the upgrade note. (See the analyst's track record here.)

While this may be a cause for some concern, the company could work toward lowering its leverage to 4x in three quarters and 3x in six quarters from growing EBITDA as part of the deal.

The structure of the deal improves Microchip Technology's accretion potential to the point where it could exceed management's own guidance, according to SunTrust.

The company's explicit EPS target of $8 in 2021 for the combined company is "quite conservative," and the deal could boost Microchip Technology's earnings by 20 to 30 percent, Stein said.

As a standalone business, Microsemi had strong exposure to the three "Ds" in the semiconductor business: defense, data center, and deals, the analyst said. With the company now coupled with Microchip Technology's focus on data center, communications and aerospace/defense, there are "meaningful" cross-selling opportunities given the minimal overlap in the end market and product exposure between the two companies, according to SunTrust. 

Price Action

Shares of Microchip Technology were higher by nearly 1.67 percent at $90.50 Friday morning, while Microsemi's stock was higher by 4.47 percent at $67.18. 

Related Links:

Benzinga Pro's 7 Stocks To Watch Today

30 Stocks Moving In Friday's Pre-Market Session