BofA raises Microchip on sales inflection and cost cuts

Investing.com -- Bank of America upgraded Microchip Technology (NASDAQ: MCHP) to Neutral from Underperform on Friday.

The bank cited early signs of a sales recovery, aggressive cost-cutting measures, and renewed strategic focus under the leadership of returning CEO Steve Sanghi.

“The return of well-regarded prior CEO Steve Sanghi has greatly enhanced the level of restructuring urgency and customer/product focus at Microchip,” BofA analysts wrote in a note.

They pointed to an improving outlook in industrial markets such as aerospace and defense, which are key end markets for the company.

Following a better-than-expected earnings report, BofA raised its price objective for Microchip to $56 from $44, noting that the upgrade comes despite the company still facing a “very deep” downturn.

“MCHP’s 50-60% peak-trough correction remains the deepest in the industry,” the firm noted, and recovering its prior earnings power without a strong macro rebound is “a risky assumption in the current macro environment.”

Still, BofA is optimistic about the company’s earnings potential. “Even a modest sales rebound could translate into outsized earnings leverage,” analysts wrote.

They forecast a potential return to normalized $3 per share earnings by fiscal 2028, supported by gross margins expanding from ~53% to the low-60% range and improved operating efficiencies.

BofA now expects pro forma EPS of $0.96/$2.11/$2.73 for calendar years 2025 through 2027.

Cost-saving actions are said to be central to the turnaround story. “Mgmt. is highly focused on turnaround efforts,” BofA said, citing the closure of Microchip’s Tempe fab, a 10% reduction in workforce, and a reoriented go-to-market strategy.

While risks remain, BofA sees earnings inflection and operational discipline as meaningful offsets to these challenges.

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