Berko: Don’t chip in for Microchip
By Malcolm Berko Taking Stock December 27, 2012 5:54PM
Updated: January 29, 2013 6:18AM
Dear Mr. Berko: Please tell me what a microcontroller is. Our broker has advised us to buy 200 shares of Microchip Technology Inc., which makes microcontrollers, for each of our individual retirement accounts. It yields 4.4 percent, and the earnings look good. We are concerned about this market and wonder whether we should wait and see whether it moves lower.
Dear GA: Microchip Technology (MCHP — $33) is a $1.7 billion manufacturer of specialized semiconductor products for embedded and control applications. Its microcontrollers are basically teeny computers on a chip. “Micro” tells you that the devices are small, and “controller” tells you that the device is used to control objects, processes or events.
Another term for a microcontroller is “embedded controller” because the microcontroller and its support circuits are built into (embedded in) the devices they control.
Steve Sanghi, a remarkable president and CEO, has magnificently guided MCHP through some tough economic times during the past 15 years. And his carefully scripted acquisitions — such as Asic Technical Solutions (1999), TelCom Semiconductor (2001), Roving Networks (2009), Silicon Storage Technology (2010), Ident Technology AG (2011) and Standard Microsystems (2012) — have added numerous new technologies, broadened product mix and depth, refined manufacturing procedures, improved revenues and added stability to earnings.
MCHP’s recent acquisition of Standard Microsystems (smart mixed-signal connectivity solutions for embedded applications) complements MCHP’s offerings and provides a vast array of new products in the automotive, industrial, computing, consumer and wireless audio markets.
German-based Ident Technology AG greatly strengthens MCHP’s position in proximity and touch-sense and touch-screen controller solutions for the embedded markets. Sanghi probably has several other acquisitions on his drawing board to expand and improve MCHP’s product line. His acquisitions have increased MCHP’s ability to compete in this competitive market because he knows the value of what he is buying and he’s able to seamlessly integrate the acquired company into the MCHP fold.
MCHP owes its continuing success to Sanghi, who combines a superb understanding of the semiconductor business and its future direction with an unusual combination of engineering mastery, financial acumen and people skills. Frankly, MCHP without Sanghi would be either bankrupt or a penny stock.
I don’t know a computer chip from a potato chip, but I do know that MCHP’s 2013 revenues are expected to come in at $1.9 billion and that earnings are expected to rise to $2.30 from last year’s $2 and its dividend may be increased to $1.43. And this dividend, which has grown from 4 cents in 2002 and yields 4.4 percent today, could increase to $2.20 by 2016 if earnings come in at $3.45 on revenues of $2.5 billion as the Street believes they will three years hence.
But I wouldn’t buy MCHP at today’s $33 price where it trades at 15.5 times earnings. Though MCHP is a swell company, I don’t see any upside to the stock for a while. A smarter move would be to place a do not reduce order with gtc, or good till canceled, added to buy the stock at a $25.50 limit, which was its low share price in 2010. It might not fill, but if it did fill, you might have to wait 10 to 12 months for the order to execute. When placing gtc on an order, a broker automatically will reduce the limit price on the ex-dividend date by the amount of the quarterly dividend it pays. In this instance, the brokerage would reduce the $25.50 price by 35 cents, to $25.15, and three months later, the price would be reduced to $24.80. Putting “DNR” on the order ticket tells the trader to keep the price at $25.50 and not to reduce it by the amount of its quarterly dividend.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.