Is Microchip Technology undervalued based on future cash flows and its price relative to the stock market?
Value is all about what a company is worth versus what price it is available for. If you went into a grocery store and all the bananas were on sale at half price, they could be considered undervalued.
INTRINSIC VALUE BASED ON FUTURE CASH FLOWS
Here we compare the current
share price of Microchip Technology to its discounted cash flow value.
The discounted cash flow value is simply looking at what the company is worth today, based on estimates of how much money it is expected to make in the future.
How is this discounted cash flow calculated?
Amount off the current price Microchip Technology is available for.
Share price is $66.93 vs Future cash flow value of $115.42
Current Discount Checks
For Microchip Technology to be considered undervalued it must be available for at least 20% below the current price. Less than 40% is even better.
- Microchip Technology's share price is below the future cash flow value, and at a significant discount (> 20%).
- Microchip Technology's share price is below the future cash flow value, and at a substantial discount (> 40%).
We assess Microchip Technology's value by looking at:
- Is the discounted cash flow value less than 20%, or 40% of the share price? (2 checks) (Click here or on bar chart for details of DCF calculation.)
- Is the PE ratio less than the market average, and/ or less than the Semiconductors industry average (and greater than 0)? (2 checks)
- Is the PEG ratio within a reasonable range (0 to 1)? (1 check)
- Is the PB ratio less than the Semiconductors industry average (and greater than 0)? (1 check)
Microchip Technology has a total score of 3/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations including PE and PEG Ratio.
Note 2: PEG ratio is based on analysts EPS growth expectations in 1 year (602.67%).
Full details on the Value part of the Simply Wall St company analysis model.
Discounted cash flow (Free cash flow to Equity)
The calculations below outline how an intrinsic value for Microchip Technology is arrived at by discounting future cash flows to their present value. We use analyst's estimates of cash flows going forward 5 years.
5 year cash flow forecast
See our documentation to learn about this calculation.
|Levered FCF (USD, Millions)
||Extrapolated @ (16.96%)
||Extrapolated @ (16%, capped from 16.96%)
Discounted (@ 9.4%)
Present value of next 5 years cash flows:
Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)
Terminal Value = $2,073 × (1 + 2.5%) ÷ (9.42% – 2.5%)
Terminal value based on the Perpetuity Method where growth (g) = 2.5%:
Present value of terminal value:
Equity Value (Total value) = Present value of next 5 years cash flows + terminal value
Value = Total value / Shares Outstanding ($24,933 / 216)
Value per share:
Current discount (share price of $66.93): 42%
Estimate of Discount Rate
The discount rate, or required rate of return, is estimated by calculating the Cost of Equity.
Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)
Discount rate = 9.42% = 2.47% + (0.923 * 7.53%)
Estimate of Bottom Up Beta
The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is limited to 0.8 to 2.0 (practical range for a stable firm).
Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))
0.923 = 0.803 (1 + (1- 30%) (21.48%))
Levered Beta used in calculation = 0.923
- The risk free rate of 2.47% is from the 10 year government bond rate in United States.
- The bottom-up beta is estimated by analysing other companies in the same industry.
- The Equity Risk Premium is calculated by subtracting the risk free rate from the market return premium (10%) (source: Buffet).
- The dividend discount model is automatically used for companies in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs), Diversified Financial Services and Capital Markets.
How is Microchip Technology expected to perform in the next 1 to 3 years based on estimates from 14 analysts?
The future performance of a company is measured in the same way as past performance, by looking at estimated growth and how much profit it is expected to make.
Future estimates come from professional analysts. Just like forecasting the weather, they don’t always get it right!
Expected earnings growth over 3 years.
Future Earnings growth analysis
Is Microchip Technology expected to grow at an attractive rate? We look at the 1 year and 3 year growth below.
Are Microchip Technology's annual earnings growth expected to exceed 3.6% over the next 3 years?
- After 1 year
- After 3 years
1 & 3 year estimated growth in earnings
Past and Future Earnings per Share
The accuracy of the analysts who estimate the future performance data can be gauged below. We look back 3 years and see if they were any good at predicting what actually occured. We also show the highest and lowest estimates looking forward to see if there is a wide range.
Analysts growth expectations
2 year growth check
Which of the these is expected to increase by over 50% in 2 year's time?
Performance in 3 years
In the same way as past performance we look at the future estimated return (profit) compared to the available funds. We do this looking forward 3 years.
- Microchip Technology is expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be above 20%.
Improvement & Relative to industry
- Expected to be above the Semiconductors industry average.
- A decline in Microchip Technology's performance (ROE) is expected over the next 3 years.
Future performance checks
We assess Microchip Technology's future performance by looking at:
- Is the growth in earnings expected to beat the low risk savings rate, plus a premium to keep pace with inflation, in 1 year and 3 years? (2 checks)
- Does the average analyst expect Revenue to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Operating Cash Flow to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Net Income (Profit) to increase by 50% or more in 2 years? (1 check)
- Is the Return on Equity in 3 years expected to be over 20%? (1 check)
Some of the above checks will fail if the company is expected to be loss making in the relevant year.
Microchip Technology has a total score of 5/6, see the detailed checks below.
Note: If no +3 year data is available, +2.5 year data may be used.
Note 2: We use GAAP per Share in all our calculations.
Full details on the Future part of the Simply Wall St company analysis model.
How has Microchip Technology performed over the past 5 years?
The past performance of a company can be measured by how much growth it has experienced and how much profit it makes relative to the funds and assets it has available.
Past earnings growth
Below we compare Microchip Technology's growth in the last year to its industry (Semiconductors).
Past Earnings growth analysis
We also check if the company has grown in the past 5 years, and whether it has maintained that growth in the year.
- Microchip Technology's earnings growth has not matched the industry average in the past year.
- Microchip Technology's 1 year earnings growth is negative.
- Microchip Technology earnings have fallen over the past 5 years.
Microchip Technology's revenue and profit over the past 5 years is shown below, any years where they have experienced a loss will show up in red.
Performance last year
We want to ensure a company is making the most of what it has available. This is done by comparing the return (profit) to a company's available funds, assets and capital.
- Poor return on shareholders funds (ROE) last year.
- Microchip Technology performed worse than the Semiconductors industry average based on return on assets (ROA) last year.
- Performance based on revenue producing assets (ROCE) has been diminishing over 3 years.
Past performance checks
We assess Microchip Technology's performance over the past 5 years by checking for:
- Has earnings per share (EPS) increased in past 5 years? (1 check)
- Has the EPS growth in the last year exceeded that of the Semiconductors industry? (1 check)
- Is the current EPS growth higher than the average annual growth over the past 5 years? (1 check)
- Is the Return on Equity (ROE) higher than 20%? (1 check)
- Is the Return on Assets (ROA) above industry average? (1 check)
- Has the Return on Capital Employed (ROCE) increased from 3 years ago? (1 check)
The above checks will fail if the company has reported a loss in the most recent earnings report. Some checks require at least 3 or 5 years worth of data.
Microchip Technology has a total score of 0/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations.
Full details on the Past part of the Simply Wall St company analysis model.
How is Microchip Technology's financial health and their level of debt?
A company's financial position is much like your own financial position, it includes everything you own (assets) and owe (liabilities).
The boxes below represent the relative size of what makes up Microchip Technology's finances.
The net worth of a company is the difference between its assets and liabilities.
- Microchip Technology is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
- Microchip Technology's long term commitments exceed its cash and other short term assets.
This treemap shows a more detailed breakdown of Microchip Technology's finances.
If any of them are yellow this indicates they may be out of proportion and red means they relate to one of the checks below.
Liabilities and shares
The 'shares' portion represents any funds contributed by the owners (shareholders) and any profits.
- Low level of unsold assets
- Total debt is not covered by total short term assets.
Nearly all companies have debt. Debt in itself isn’t bad, however if the debt is too high, or the company can’t afford to pay the interest on its debts this may have impacts in the future.
The graphic below shows equity (available funds) and debt, we ideally want to see the red area (debt) decreasing.
If there is any debt we look at the companies capability to repay it, and whether the level has increased over the past 5 years.
- The level of debt (123%) compared to net worth is high (greater 40%).
- The level of debt compared to net worth has increased over the past 5 years (18% vs 123% today).
- Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
- Interest on debt is not strongly covered (ideally 5x) by earnings (earnings are 0.5x annual interest expense).
Financial health checks
We assess Microchip Technology's financial health by checking for:
Full details on the Health part of the Simply Wall St company analysis model.
- Are short term assets greater than short term liabilities? (1 check)
- Are short term assets greater than long term liabilities? (1 check)
- Has the debt to equity ratio increased in the past 5 years? (1 check)
- Is the debt to equity ratio over 40%? (1 check)
- Is the debt covered by short term assets? (1 check)
- Are earnings greater than 5x the interest on debt (if comapany pays interest at all)? (1 check)
Microchip Technology has a total score of 2/6, see the detailed checks below.
What is Microchip Technology's current dividend yield, its reliability and sustainability?
Dividends are regular cash payments to you from the company, similar to a bank paying you interest on a savings account.
Annual Dividend Income
Current annual income from Microchip Technology dividends. Estimated to be 2.13% next year.
If you bought $2,000 of Microchip Technology shares you are expected to receive $44 in your first year as a dividend.
Here we look how much dividend is being paid, if any. Is it above what you can get in a savings account?
It is up there with the best dividend paying companies?
- Paying above low risk savings rate. (1.75%)
- Paying below the markets top dividend payers. (3.18%)
Historical dividend yield
It is important to see if the dividend for a company is stable, and not wildly increasing/decreasing each year. This graph shows you the historical rate to count toward your assessment of the stock.
We also check to see if the dividend has increased in the past 10 years.
- Dividends per share have been stable in the past 10 years.
- Dividends per share have increased over the past 10 years.
Current Payout to shareholders
What portion of Microchip Technology's earnings are paid to the shareholders as a dividend.
- Dividends paid are not well covered by net profit (0.2x coverage).
Future Payout to shareholders
- Dividends after 3 years are expected to be well covered by net profit (3.2x coverage).
Income/ dividend checks
We assess Microchip Technology's dividend by checking for:
Full details on the Dividends part of the Simply Wall St company analysis model.
- Firstly is the company paying a notable dividend (greater than 0.5%) - if not then the rest of the checks are ignored.
- Current dividend yield, is there one at all, is it higher than the low risk savings rate, and is it above the top 25% of dividend payers? (2 checks)
- Have they paid a dividend for 10 years, and during this period has the dividend been volatile (drop of more than 25%)? (1 check)
- If they have paid a dividend for 10 years has it increased in this time? (1 check)
- How sustainable is the dividend, can Microchip Technology afford to pay it from its earnings today and in 3 years (Payout ratio less than 90%)? (2 checks)
Microchip Technology has a total score of 4/6, see the detailed checks below.
What is the CEO of Microchip Technology's salary, the management and board of directors tenure and is there insider trading?
Management is one of the most important areas of a company. We look at unreasonable CEO compensation, how long the team and board of directors have been around for and insider trading.
Mr. Stephen Sanghi, also known as Steve, has been the Chief Executive Officer of Microchip Technology Inc. October 1991. Mr. Sanghi is employed by Microchip since February 1990. He served as President of Microchip Technology Inc from August 1990 to February 2016. He served as Acting Chief Executive Officer of FlipChip International, LLC from March 2013 to September 2013. He worked for Intel Corporation from 1978 to 1988 in various engineering and management positions, including General Manager of Intel's programmable memory operation. He has been the Chairman of Microchip Technology Inc. since October 1993 and FlipChip International, LLC since September 2013. He serves as Chairman of FIRST. He served as the Chairman of Adflex Solutions Inc. since April 1999. He has been a Director of Microchip Technology Inc. since August 1990. He serves as a Director of FlipChip International, LLC. He serves as a Director of United States Foundation For Inspiration And Recognition Of Science And Technology. He served as a Director of Xyratex Ltd. since May 2004 until March 31, 2014. He served as a Director of Adflex Solutions Inc. since June 1994. Mr. Sanghi served as Member of the Board of Directors of Hittite Microwave Corporation since October 1, 2013 until July 22, 2014. Mr. Sanghi served as Member of the Board of Trustees of Kettering University in Flint, Michigan since September 2004. He served as a Director of Vivid Semiconductor Inc. and Artisoft. He served as a Director of FIRST Organization since May 2007. Mr. Sanghi holds a Bachelor of Science in Electronics and Electrical Communications Engineering from Punjab Engineering College in India in 1975 and holds an MS degree in Electrical and Computer Engineering from the University of Massachusetts in Amherst, Massachusetts.
- CEO's compensation has been consistent with company performance over the past year.
- CEO's compensation is higher than average for a company of this size and profit level.
Chairman of the Board and Chief Executive Officer
President and Chief Operating Officer
Chief Financial Officer and Vice President of Finance
Vice President of MCU8 and Technology Development Division
Vice President of Worldwide Sales & Applications
Kim van Herk
Board of Directors Tenure
Average tenure of the Microchip Technology board of directors:
- The average tenure for the Microchip Technology board of directors is over 10 years, this suggests they are a seasoned and experienced board.
Board of Directors
Chairman of the Board and Chief Executive Officer
Recent Insider Trading
- Microchip Technology insiders have sold more shares than they have bought in the past 3 months.
Who owns this company?
We assess Microchip Technology's management by checking for:
- Is the CEO's compensation unreasonable compared to market cap and profit (greater than 0.5% of the company's profit + 0.03% of market cap)? (1 check)
- Has the CEO's compensation increased more than 20% whilst the EPS is down more then 20%? (1 check)
- Is the average tenure of the management team less than 2 years? (1 check)
- Is the average tenure of the board of directors team less than 3 years? (1 check)
Microchip Technology has a total score of 6/6, this is not included on the snowflake, see the detailed checks below.
Note: We use the top 6 management executives and board members in our calculations.
Note 2: Insider trading include any internal stakeholders and these transactions
Full details on the Management part of the Simply Wall St company analysis model.
Microchip Technology Incorporated develops, manufactures, and sells semiconductor products for various embedded control applications. The company offers microcontrollers, such as 8-bit, 16-bit, and 32-bit microcontrollers under the PIC brand name; and microcontrollers for automotive networking, computing, lighting, power supplies, motor control, wired connectivity, and wireless connectivity. It also provides development tools that enable system designers to program PIC microcontrollers for specific applications; analog, interface, mixed signal, and timing products comprising power management, linear, mixed-signal, high-voltage, thermal management, RF, drivers, safety and security, USB, Ethernet, wireless, and other interface products; and memory products consisting of serial electrically erasable programmable read-only memory, serial flash memories, parallel flash memories, and serial SRAM memories for the production of very small footprint devices. In addition, the company licenses its SuperFlash embedded flash and Smartbits one time programmable NVM technologies to foundries, integrated device manufacturers, and design partners for use in the manufacture of microcontroller products, gate array, RF, and analog products that require embedded non-volatile memory, as well as provides engineering services. It serves automotive, communications, computing, consumer, office automation, telecommunication, aerospace, defense, safety, security, medical, and industrial control markets. The company sells its products through a network of direct sales personnel and distributors in the Americas, Europe, and Asia. Microchip Technology Incorporated was founded in 1989 and is headquartered in Chandler, Arizona.
|Name:||Microchip Technology Incorporated|
|Market Cap:||$14,458 million|
2355 West Chandler Boulevard, Chandler, 85224, United States
Microchip Technology employees.
|Sector:||Semiconductors and Semiconductor Equipment|