Has Microchip Tech's Recent Run Made The Stock Too Pricey?

Morgan Stanley downgraded shares of Microchip Technology Inc. MCHP following big gains. The stock has added 48 percent in the year-to-date period and has gained roughly 87 percent since the start of the third quarter.

The firm said it would use the strength in the stock to take some profits.

As such, the firm downgraded shares of Microchip Technology from Overweight to Equal-Weight but lifted its price target from $94 to $96, as it increased its target P/E multiple by 0.5 times turn to 18 times to bring it closer to comps.

Analysts Craig Hettenbach and Joseph Moore said the company is benefiting from the strongest upcycle in analog/MCUs in seven years. The analysts attributed the above-average estimate revisions to company-specific factors such as significant Atmel accretion, strong execution on expanding core margins.

However, the analysts said the gap between their estimates and the Street has narrowed from 12 percent more than a year ago to 2 percent presently. The analysts also said the magnitude of beats will likely dwindle following the company's average earnings and revenue outperformance of 11.5 percent and 2.5 percent, respectively over the past four quarters.

See also: AMD, Microchip Tech Among Q3 Semiconductor Favorites At Jefferies

Morgan Stanley still views Microchip as a leader in MCUs/analog, although it sees growing signs of cyclical risks. The firm expects September quarter earnings to be positive but priced in at current levels.

Microchip Technology is scheduled to report its quarterly results on Nov. 6. Morgan Stanley expects 3.1 percent sequential revenue growth to $1 billion, in line with the Street, and non-GAAP earnings per share of $1.36, 1 cent above the Street estimate.

However, the firm said a solid report is already priced into the stock. Additionally, the firm noted that Texas Instruments Incorporated TXN and Amphenol Corporation APH traded flat to down even on strong earnings, which show that investors are already anticipating strength.

The firm now sees a measured risk/reward for Microchip Technology, and accordingly move to the sidelines. That said, the firm believes the company to be a long-term winner in the group. All the same, the firm expects investors to get better opportunities to build positions in the stock.