Looking at calendar fourth quarter results so far, there is definitely a little cause for concern about the cyclical slowdown. That puts Maxim Integrated Products (Nasdaq:MXIM) investors in the midst of a bit of a quandary - will product wins in popular consumer products like smartphones, TVs and tablets be enough to overpower cyclical pressures, or is the company just going to go through the same trouble a little later?

IN PICTURES: 9 Simple Investing Ratios You Need To Know

The Quarter That Was
Maxim reported a pretty solid fiscal second quarter. Revenue was down 2% on a sequential basis, but up 29% from last year and a bit ahead of the published average analyst guess. Communications was a standout (up sequentially by 3%), while computers were notably weak - especially notebooks. Profitability was not bad either. GAAP gross margin did improve a bit on a sequential basis, but operating income did fall even after excluding some unusual items. (For more, see The Chips Are Down.)

There were a few concerning items in the details, though. The company reported that bookings dropped 15% on a sequential basis and the book-to-bill was 0.85. Lead times continue to fall and stood at 12 weeks - off a bit from the company's peak of 14, but still ahead of the "normal" level of 8-9 weeks. That is a definite risk factor for the stock - as customers can more easily get the chips they need (and get them on time), they do not need to over-order or carry larger inventories. That in turn leads to order cancellations and revenue stress.

The Road Ahead
Order times are not the only concern for Maxim investors to consider. Texas Instruments (NYSE:TXN) is building a large 300mm fab (which FBR's analyst Craig Berger has called the "Death Star") and that could produce some supply-driven pressure on the sector. Arguably Maxim would be more vulnerable than Linear Technology (Nasdaq:LLTC) and Analog Devices (NYSE:ADI) but it is hardly good news for any supplier other than TI. (For related reading, see Linear's Ups And Downs.)

Of course, there is also market demand risk. Customers like LG and Samsung have done well with their handsets and LCD TVs and there is optimism about their tablets. However, given how often words like "sales" and "surprise" go together, there is no guarantee that these markets will stay strong or that LG/Samsung gain share.

All of that being said, Maxim has a lot going for it. The company is gaining share in lucrative markets, and design wins in smartphones, TVs, tabletsa and industrial growth markets like smart meters will pay dividends. Moreover, in comparison to hot smartphone/tablet plays like ARM Holdings (Nasdaq:ARMH), Qualcomm (Nasdaq:QCOM) or Broadcom (Nasdaq:BRCM), Maxim seems like something of a bargain. (For related reading, see ARM'ed And Dangerous.)

The Bottom Line
Investors who believe Maxim can lever these design wins into more market share, more profits and more cash flow should probably hold on to these shares. There is a risk that this mid-cycle reset could be worse than investors expect (particularly if cycle-leader Linear's guidance proves to be less company-specific than people presently think), and that should not be ignored. For now, Maxim shares look a little cheap; a move to "really cheap" would require conviction and evidence that the company can produce free cash flow at a rate closer to that of Linear or Analog Devices. It is not unthinkable, but it could put Maxim into a tough place where it has to choose between margin expansion and top line growth. (For more, see Is Linear A Canary Or A Duck?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  2. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  3. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  4. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  5. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  6. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  7. Term

    What Is Financial Performance?

    Financial performance measures a firm’s ability to generate profits through the use of its assets.
  8. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  9. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  10. Stock Analysis

    The Biggest Risks of Investing in FireEye Stock

    Examine the current state of FireEye, Inc., and learn about some of the biggest risks of investing in this cybersecurity company's stock.
  1. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!