Having a favorite semiconductor stock today is sort of an odd concept, as the entire sector has had a tough go of it this year and analysts are increasingly worried about prospects for a 2013 recovery. Nevertheless, Maxim (Nasdaq:MXIM) continues to pick up share with its integrated solutions, and the company offers an attractive dividend yield. While valuation and a high consumer concentration are causes for concern, this may yet turn out to be a very interesting stock in a highly-challenged sector.

Forex Broker Guide: Using the right broker is essential when competing in today's forex marketplace.

This Is What Passes for a Strong Third Quarter in Chips
Although Maxim did not have an especially strong quarter in an objective sense, the company did reasonably well relative to expectations and its guidance revision was one of the more benign ones in the sector. With so very few chip companies in a position to have a great quarter, Maxim did at least do well on a relative basis. Revenue fell 2% from last year, but rose about 3% from the second quarter, just a tick above average expectations. Maxim saw great growth in consumer, fueled at least in part by Samsung's Galaxy S3. Everything else was weaker, though, as communications, computing, and industrial saw declines due to broad-based weaknesses. Maxim also did quite well on margins though. Gross margin decreased a bit from last year, but improved slightly on a sequential basis, while adjusted operating income decreased just slightly from last quarter as well, but rose by about 22% annually. All in all, Maxim beat expectations at both the gross and operating margins lines.

A Relatively Mild Guidance Cut, but Dangers Lurk
Relative to other analog players like Linear Technology (Nasdaq:LLTC) and Texas Instruments (NYSE:TXN) and even fellow smartphone/tablet player Broadcom (Nasdaq:BRCM), Maxim management offered a pretty mild guidance revision. Numbers are going down, but management expects sales to be flat to down 2% on a sequential basis - much better than the 5% to 10% declines projected by many other chip companies this quarter. However, don't let that guidance lull you into complacency. Management cited weakening end-user demand in industrial (nearly one-quarter of sales) and communications infrastructure is looking pretty shaky as well. Computing continues to be weak, and investors have gotten considerably more cautious as to whether Intel (Nasdaq:INTC) and Microsoft (Nasdaq:MSFT) can really reignite the space.

Last and not least, Maxim has become increasing dependent on mobile devices. Consumer devices are nearly 50% of revenue now, with a very large concentration at Samsung. While Maxim has been more successful than it gets credit for when it comes to winning sockets at other device designers such as Apple (Nasdaq:AAPL), it's still worth pointing out that slowing sales of smartphones/tablets or just worse sales at Samsung would be a bad development.

Building a Better Business for Tomorrow
Although I think the next few quarters could still be shaky (like as not from over-eager sell-side analysts hoping for a rebound), I like what Maxim is doing from a strategic perspective. The company's focus on integrated solutions plays directly into what companies such as Apple, Samsung and Amazon (Nasdaq:AMZN) want - more efficient power consumption and smaller footprints, with no compromises in functionality. At the same time, while the much greater share of Texas Instruments and Analog Devices (NYSE:ADI) in areas such as power conversion, data conversion and amplifiers is a threat, Maxim can benefit from second-source awards and innovation.

The best thing Maxim could likely do now is gain more share at non-Samsung designers. There's nothing wrong with being a supplier to Samsung (as the company trades leadership with Apple from month to month), but Samsung has a habit of internalizing its own needs over time. Maxim has seen its per-device content increase at Samsung, but becoming a little like Broadcom or Qualcomm (Nasdaq:QCOM) in terms of customer diversification would certainly help.

The Bottom Line
I like the business at Maxim, but I don't find the stock quite as appealing. High single-digit free cash flow (FCF) growth supports a fair value in the low $30s, which doesn't make the stock as compelling as that of Broadcom or LSI (NYSE:LSI). Maxim's erratic year-to-year changes in free cash flow margin make it more difficult to project more robust improvement, but if Maxim can continue to gain share with integrated solutions, the stock could yet be poised to be an outperformer in the coming years.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center