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What's in the Offing for Microchip (MCHP) in Q2 Earnings?

Microchip Technology Inc. MCHP is set to release fiscal second-quarter 2018 earnings on Nov 6. We note that the company has delivered positive earnings surprise in each of the trailing four quarters. It delivered a positive surprise of 6.50% in the last quarter.

Adjusted earnings surged 56% year over year and 12.9% sequentially to $1.31 per share in the first quarter. The strong growth was driven by higher net sales, which increased 15.2% from the year-ago quarter to $972.1 million. On a sequential basis, net sales increased almost 7.7%.

Microchip recently reaffirmed its second-quarter guidance backed by successful execution of its strategic initiatives, optimization of manufacturing operations and a favorable macro environment.

Management expects fiscal second-quarter 2018 net sales to be approximately $1.00 billion, which reflects growth of approximately 3% on a sequential basis and 14.6% on a year-over-year basis. Earnings are anticipated to be in the range of $1.33–$1.37 per share.

Let’s see how things are shaping up for this announcement.

Factors at Play

Notably, the company enhanced its product portfolio during the quarter, which is expected to boost its top line in the near term.

Microchip unveiled a sequential linear LED driver for the purpose of cost-effective LED lighting applications. The company launched new sets of microcontrollers such as SAM D5x and SAM E5x. It also unveiled MEC17XX and MEC14XX series of embedded controllers.

Additionally, it launched a new power monitoring chip named PAC1934 during the quarter. Moreover, the availability of SST26WF064C, a low-voltage 64 megabit flash memory device is also anticipated to boost revenues.

The company also announced that its Media Oriented System Transport (MOST) technology will be used in in-vehicle infotainment systems of Volvo Cars’ second-generation XC60 SUV.

Earnings Whispers

However, our proven model does not conclusively show that Microchip is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: Microchip’s Earnings ESP is -0.33%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Microchip carries a Zacks Rank #3, which when combined with a negative ESP makes earnings prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some stocks which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Adobe Systems Inc. ADBE has an Earnings ESP of +0.25% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kemet Corp. KEM has an Earnings ESP of +7.46% and carries a Zacks Rank #1.

NVIDIA Corp. NVDA has an Earnings ESP of +0.71% and carries a Zacks Rank #1.

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