“The #1 Tech Opportunity of the Decade”

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Wed, February 8 at 8:00PM ET

Valuation and ‘Megatrend’ Exposure Make Microchip Technology a Buy

Shares of industrial chip-maker Microchip Technology (NASDAQ:MCHP) cratered during the novel coronavirus sell-off. Yet, since then, MCHP stock has bounced back to prior price levels, partially due to the stock market’s rapid reversal and also thanks to the company’s recent guidance boost.

MCHP stock
Source: ©iStock.com/MADDRAT

However, is there still value left on the table? That’s the question for those who bought at lower prices, as well as those looking at the stock today.

The recent guidance raise could indicate that shares rally even higher from here. Yet, with investors pricing in a recovery, shares may pull back some more if results don’t line up with expectations.

Yet, there are other positives to consider. Valuation remains low, leaving room for multiple expansion. Also, “megatrend” exposure could also boost the stock. Granted, there’s still some uncertainty. But, relative to other opportunities out there, MCHP stock may be a solid buy for cautious investors.

Let’s dive in, and see why that’s the case.

Recent Guidance Change Is a Positive Sign

Shares have bounced back tremendously off their lows set in March. But it’s recent news that pushed the stock back to prior price levels.

On June 3, the company boosted its forecast for this quarter (ending June 30). With global manufacturing in recovery mode, this makes perfect sense. As factories worldwide reopen, expect increased demand for the company’s integrated circuits.

Following the news, investors bid up shares to their 52-week high ($113.28). However, in recent days, the stock has pulled back to around $100 per share.

Even with the recent positive developments, the analyst community remains mixed on the company’s prospects.

Some analysts, like FBR’s Craig Ellis, upgraded the stock and boosted their price targets. However, others are cautious. The main concern is whether demand has truly improved. It’s possible recent strong results will cool once manufacturing normalizes.

In other words, if manufacturing doesn’t see a V-shaped recovery, results could disappoint and send shares to lower levels.

However, the stock has plenty of runway if results meet or beat expectations. Analyst consensus for this quarter’s earnings is around $1.39 per share. If the company can beat on earnings like it did last quarter, MCHP stock could move higher. In short, the recent pullback may be a strong buying opportunity.

What’s also at play with Microchip Technology? Selling at a discount to peers, shares could move higher thanks to multiple expansion. Also, the company’s exposure to automotive technology “megatrends” is another solid reason to buy shares now.

Valuation and ‘Megatrend’ Catalyst Are Bullish

In a June 8 article, InvestorPlace’s Mark Hake included MCHP stock as one of several cheap stocks that could move higher. And looking at forward price-earnings (P/E) ratios, I agree it’s possible.

Right now, Microchip Technology shares trade for a forward P/E of 18.4. That’s far below where peers like Maxim Integrated Products (NASDAQ:MXIM) and Analog Devices (NASDAQ:ADI) trade. These rivals have forward P/E ratios of 27.9 and 28.9, respectively.

In short, multiple expansion could happen. Add in the potential for the company to continue beating projections, and it seems likely this stock can catch up valuation-wise to its peers. Perhaps MCHP stock won’t won’t bridge the gap completely, but at least enough to move the needle.

Also, shares have another potential mover in motion. That would be increased chip demand thanks to key automotive “megatrends.” As seen in a recent investor presentation, Microchip Technology has exposure to automated vehicles, increased connectivity and the pivot to electric vehicles.

As cars and trucks become more tech than machinery, MCHP stock stands to benefit. Sure, the automotive end market only makes up 15% of current sales. But, this technological shift could boost demand from this end user market, helping to support long-term growth.

MCHP Stock Is a Strong Opportunity

Right now, it’s hard to find reasonably priced stocks with upside. With Wall Street banking on a V-shaped recovery, optimism has been more than priced into the market. However, with names like this one, there’s still strong buys out there for cautious investors.

With two factors – valuation and “megatrend” exposure – that could help move the needle, this may be a buy-the-dip type of situation.

In short, consider the recent pullback a solid entry point to buy MCHP stock.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/valuation-strong-prospects-mchp-stock-buy/.

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