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Tickers in this Article: MXIM, ADI, STM, TXN, NOK, ERIC, NTDOY
High performance analog chips go into a myriad of products we use either directly, or by purchasing a product that was manufactured with their help. Maxim Integrated Products Inc.(Nasdaq: MXIM), Analog Devices Inc. (NYSE: ADI) and STMicroelectronics NV (NYSE: STM) are three analog chip companies that are all successful in their own right, but they aren't all the same. Comparing the three should present some important lessons that both investors - and the companies themselves - should be aware of.

Three Strikes and They Win
Maxim Integrated Products has positioned itself well with its product suite of high-performance analog (HPA) chips and mixed-signal integrated circuits. The company's portfolio of roughly 5,000 different circuits is sold to the communication, computing, industrial and, most recently, consumer markets, 70% of which are outside the United States. These products tend to have a life of about 10 years, so MXIM's product suite has served the company well.

Maxim has one of the most talented design teams in the business. The company has decided to leverage this team and its reputation for specialized HPA circuits into the consumer-driven marketplace for products such as digital cameras and cell phones. MXIM has several advantages: it can produce the most popular types of circuits, it can integrate or modify existing designs to save time and money, and it can spread research and development (R&D) expenses over considerably more unit sales.

MXIM has had some previous difficulties in serving a fickle consumer market where orders can be erratic and extremely time sensitive. Having stubbed its toe on this before, we have to assume that MXIM has learned from and can now overcome this obstacle.

Not Playing Games
Analog Devices has roughly 60,000 customers around the globe that buy its high-performance analog, mixed-signal and signal-processing integrated circuits. Approximately 80% of ADI's business stems from research-driven, proprietary products. The company maintains its competitive edge with an ongoing program of powerful new chips. To augment its own R&D effort, ADI has no bones about buying technology it doesn't have through acquisitions. (To learn more, read The Hidden Value Of Intangibles.)

Nintendo's (OTC: NTDOY) Wii video game console put ADI on the map by selling millions of game systems. ADI has used that success to leverage its way into other consumer-driven products. ADI is now focusing on the automotive market as well, with some intriguing new products such as a new chip designed to sense a collision and deploy a vehicle's airbag sooner.

ADI does have some products (such as its power management products) that are a drag on its otherwise admirable performance. ADI also faces some formidable competition from such firms as the industry's 800-pound gorilla, Texas Instruments Inc. (NYSE: TXN).

Hold the Phone Please

STMicroelectronics NV is Europe's largest semiconductor manufacturer. Unfortunately, the company's decision to reduce its research and development spending years ago has since limited its financial performance. Apparently, STM thought that the French and Italian government's combined 30% ownership stake would be a larger benefit to the company, but because those governments also control the firm's board of directors, they may not share a vested interest with public shareholders. (For related reading, see Buying Into R&D.)

What has saved STM's bacon are the sales of cell phone components to Nokia (NYSE: NOK) and LM Ericsson Telephone Company's (Nasdaq: ERIC) Sony Ericsson Mobile Communications joint venture. STM can thank NOK and other cellphone related companies for 40% of its revenue. However, this may be a mixed blessing because it makes STM extremely sensitive to the mobile phone business. Furthermore, many of the components that go into cell phones are often low-margin ones.




STM has recently announced an increase to its dividend and the firm's shareholders have approved the repurchase of 10% of the outstanding shares. While not terribly sexy, STM's product line has produced stable returns in the past. Whether this continues to be the case is open to debate.

R&D Begets ROE
It's all about innovation. Edward Boeing knew this, as did Glenn L. Martin and Allan and Malcolm Loughheed. Bill Gates and Steve Jobs also found success through innovation. The examples could go on for pages.

Let's see what the market thinks. Price/earnings multiples can be deceiving; MXIM trades at 19-times earnings, while ADI and STM trade at roughly 25 times. Market capitalization as a multiple of revenue can be enlightening, particularly in terms of research and development budgets and return on equity. MXIM's market cap is 6.45 times its sales. The company budgets 25% of sales for R&D and has an ROE of 17.8%. ADI's market cap is 4.8 times its sales, while the firm budgets almost 22% of sales to R&D and enjoys an ROE of 18.3%. STM's market cap is 1.8 times its sales and its budgets is not quite 17% of sales to R&D; it sports an ROE of 8.6%. So where would you put your money?

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