Microchip Technology's path to recovery: Analysts see stable earnings due to continued inventory management – Microchip Technology (NASDAQ:MCHP)

Piper Sandler analyst Harsh V. Kumar reiterated his neutral rating. microchip technology company (NASDAQ:MCHP) Price target for April 26th is $80.

The rerating reflected the timing of a potential macro recovery.

Kumar noted that the company is continuing its inventory clearing process and that most of its business is poised to recover in the second half of this year.

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Specifically, inventories are being cleared in the automotive and industrial industries, and management sees new growth emerging in these markets.

The analyst noted that management plans to reduce inventory across the channel, which will be significantly lower than demand at this time. Based on comments made during the quarter, MCHP expects revenue to remain roughly flat going into its second calendar quarter guidance.

According to Kumar, the combination of inventory recovery and operating expenditure measures will allow MCHP's model to benefit if demand trends spike post inventory clearance. Regarding gross margins, the magnitude and sharpness of the downturn has led the company to adjust operating rates accordingly.

Kumar said that in the long term, the company continues to aim for a gross profit margin of 68% and an operating margin of 45%. Analysts say current margin levels are artificially low due to the current economic cycle and the company plans to achieve increased leverage. He said margin recovery should be driven by mix and occupancy improvements as revenue growth resumes.

The analyst emphasized that Microchip continues to maintain capital expenditures across its businesses at historical levels despite the downward trend in business and demand outlook. Additionally, the company also received up to $162 million in grants through his CHIPS Act, according to media reports. Kumar noted that this capital investment will position MCHP well for the next economic cycle after inventory recovery.

Kumar expected fourth-quarter revenue of $1.33 billion and EPS of $0.57.

Microchip Technology shares have risen more than 24% in the past 12 months. Investors can gain exposure to stocks in the following ways: Columbia ETF Trust I Columbia Seligman Semiconductor and Technology ETF (NYSE:SEMI) and First Trust Nasdaq Semiconductor ETF (NASDAQ:FTXL).

price action:MCHP stock was down 0.16% at $93.45 pre-market at last check on Monday.

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