Wednesday, November 05, 2008

Microchip Tech (NASDAQ:MCHP) downgraded to Sell at Goldman Sachs

Goldman Sachs is out with a interesting downgrade to Sell on Microchip Tech (NASDAQ:MCHP) noting their checks indicate the market is starting to shift away from its core strengths, leading them to reevaluate the story. Firm says they have done extensive field work on the microcontroller market, prompted in part by Microchip’s proposal on October 2, 2008, to acquire Atmel’s MCU business. They have conducted more than a dozen meetings and calls with industry participants and contacts. They also spent two full days at the Embedded Systems conference in Boston on October 27-28, meeting with dozens of companies in the MCU ecosystem to garner insight into the state of the market. The slowdown in Microchip’s core growth and impact from increasing competition in MCUs is at the center of the downgrade to Sell from Neutral as well as a reduction in estimates and price target.

GSCO expects Microchip’s growth to be negatively affected by the following three points:

1) checks suggest an increasing pace of upgrades away from 8 bit to 16 and 32 bit, driven in part by ARM-based products;

2) Microchip is underexposed to fast-growing applications such as touch control and ultra low power;

3) Increasing competition, especially from large diversified companies (STM, TXN Freescale), which may lead to pricing and gross margin pressure in addition to slower growth. These factors, combined with what they view as an unwarranted 20% premium valuation in MCHP relative to its peers, lead the firm to a more negative stance on the stock. Firm adds that MCHP has outperformed the SOX by 20% in the past year and by 40% from the market low in 2002. They are lowering 6-month price target to $21 from $26.

Notablecalls: This is a pretty strong downgrade from Goldman. They went out and gathered new info. That's what every analyst should do. Goldman's tgt is way below current mkt price - I suspect the stock will get hit today.

How big of a hit?

Well, that depends on the market. If we are in a pull-back mode MCHP could see 7-8% downside today.

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