Microchip Technology Inc (MCHP, Financial) saw a daily gain of 3.75%, with an Earnings Per Share (EPS) of 4.01. The question arises: is this stock fairly valued? This article aims to answer this query, offering an in-depth valuation analysis of Microchip Technology. We invite you to explore the financial details and insights that follow.
A Snapshot of Microchip Technology Inc (MCHP, Financial)
Microchip Technology became an independent company in 1989 when it was spun off from General Instrument. Over half of the company's revenue comes from MCUs, which are utilized in a wide array of electronic devices, from remote controls to garage door openers to power windows in autos. The company's strength lies in lower-end 8-bit MCUs suitable for a broader range of less technologically advanced devices. However, the firm has expanded its presence in higher-end MCUs and analog chips as well.
With a stock price of $91.65 and a GF Value of $91.75, Microchip Technology appears to be fairly valued. This conclusion is based on an intricate blend of the company's financial data and historical trends. Here's a look at the income breakdown of Microchip Technology:
Understanding the GF Value of Microchip Technology (MCHP, Financial)
The GF Value is a proprietary measure that represents the intrinsic value of a stock. It is derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded.
Microchip Technology (MCHP, Financial) appears to be fairly valued based on the GuruFocus valuation method. This assessment is based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns. At its current price of $91.65 per share, Microchip Technology stock appears to be fairly valued.
Because Microchip Technology is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Microchip Technology's Financial Strength
Investing in companies with poor financial strength poses a higher risk of permanent capital loss. Therefore, it is crucial to carefully review a company's financial strength before deciding to buy its stock. Looking at the cash-to-debt ratio and interest coverage is an excellent starting point for understanding a company's financial strength. Microchip Technology has a cash-to-debt ratio of 0.04, which is worse than 97.8% of companies in the Semiconductors industry. GuruFocus ranks the overall financial strength of Microchip Technology at 6 out of 10, indicating that the financial strength of Microchip Technology is fair.
This is the debt and cash of Microchip Technology over the past years:
Profitability and Growth of Microchip Technology
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Microchip Technology has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $8.4 billion and Earnings Per Share (EPS) of $4.01. Its operating margin of 36.88% is better than 95.84% of companies in the Semiconductors industry. Overall, GuruFocus ranks Microchip Technology's profitability as strong.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Microchip Technology is 13.7%, which ranks better than 55.01% of companies in the Semiconductors industry. The 3-year average EBITDA growth rate is 26.9%, which ranks better than 55.71% of companies in the Semiconductors industry.
ROIC vs WACC: Evaluating Profitability
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Microchip Technology's ROIC is 15.74 while its WACC came in at 11.
The historical ROIC vs WACC comparison of Microchip Technology is shown below:
Conclusion
In summary, the stock of Microchip Technology (MCHP, Financial) gives every indication of being fairly valued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 55.71% of companies in the Semiconductors industry. To learn more about Microchip Technology stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
