Dodge & Cox disclosed this week it increased its holding of Microchip Technology Inc. (MCHP, Financial) by approximately 35% on June 30 according to GuruFocus Real-Time Picks, a Premium feature of our website.
Founded in 1930 by Van Duyn Dodge and E. Morris Cox, the firm employs a team-oriented investing approach: A nine-person team makes decisions regarding the firm’s portfolio investments, seeking long-term capital appreciation through securities where the current valuations do not reflect long-term earnings and cash-flow prospects.
Dodge & Cox mentioned in its December 2018 shareholder letter that while market volatility “can create buying opportunities for patient, long-term, value-oriented investors,” the firm emphasizes on individual company fundamentals relative to valuation. Dodge & Cox focuses on several factors, including financial strength, cash flow and dividends.
The firm has not released its June quarter portfolio as the deadline is 45 days after quarter-end. As of the March quarter, the firm’s $121.82 billion equity portfolio contains 179 stocks, with 23.80% exposure to the financial services sector and 18.53% exposure to the technology sector.
Transaction details
Dodge & Cox added 6,555,638 shares of Microchip Technology, increasing the position to 25,240,121 shares, representing approximately 10.6% of the company’s total shares outstanding. The stock closed at $86.70 on June 28 and $91.40 on July 1.
Company background and financial position
The Chandler, Arizona-based company develops, manufactures and sells specialized semiconductor products for a wide variety of embedded control applications. Over 50% of the company’s revenues stem from microcontrollers, which are used in remote controls, garage door openers and power windows in automobiles.
Microchip operates in the semiconductor industry, an industry where competitive pressures require the company to expand product functionality and provide differentiation while maintaining or reducing cost. Microchip’s competitors include major semiconductor manufacturers like NXP Semiconductors NV (NXPI, Financial), Skyworks Solutions Inc. (SWKS, Financial) and Xilinx Inc. (XLNX, Financial).
GuruFocus ranks Microchip’s financial strength 4.3 out of 10 on several weak signs, which include a debt-to-Ebitda ratio that exceeds Joel Tillinghast’s warning level of 4 and an Altman Z-score that suggests possible financial distress. Additionally, the company’s Sloan ratio of 29.93% exceeds the warning level of 25%, suggesting poor earnings quality.
Despite poor financial strength, Microchip’s profitability ranks a strong 8 out of 10 on positive signs like consistent revenue growth: The company has a 2.5-star business predictability rank and a three-year revenue growth rate that outperforms 82.46% of global competitors.
Other gurus riding Microchip’s profitability include Al Gore (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Tom Gayner (Trades, Portfolio).
Disclosure: No positions.
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