Benzinga | Oct 19, 2020 11:50AM EDT

Why This Microchip Technology Analyst Is Turning Bullish

The significant underperformance in Microchip Technology Inc's (NASDAQ:MCHP) stock presents an attractive buying opportunity for "one of the best operators at a discount to the group," according to Morgan Stanley.

The Microchip Technology Analyst: Craig Hettenbach upgraded Microchip Technology from Equal-Weight to Overweight and raised the price target from $109 to $131.

The Microchip Technology Thesis: The stock does not fully reflect the company's improving business mix and potential for margin expansion, Hettenbach said in the Monday upgrade note.

The market has punished Microchip Technology for its "meaningfully higher net debt and leverage ratio," the analyst said. That's mainly due to the acquisition of Microsemi Corporation (NASDAQ:MSCC) just before the semi industry entered a downturn in the back half of 2018, only to be followed by a global recession due to COVID-19, he said.

"However, the addition of Microsemi also improved Microchip's end market diversification and was a factor behind much better margin performance than peers over the last two years, which should ultimately drive the stock's multiple higher especially as leverage is coming down rapidly."

MCHP Price Action: Shares of Microchip Technology had risen by 2.08% to $113.11 at the time of publication Monday.