Intersil the Interloper

High-performance analog companies such as Linear Technology (Nasdaq: LLTC  ) and Maxim Integrated Products (Nasdaq: MXIM  ) have a pretty sweet setup going. Exposure to high-end consumer goods like cell phones, MP3 players, cameras, and so on has been good for their growth, and solid intellectual property and technical know-how have built up very solid gross margins.

Then along comes Intersil (Nasdaq: ISIL  ) and threatens to shake everything up.

This was a good quarter for Intersil, and I don't say that simply because it beat the numbers from Wall Street's howler monkeys (that's "equity research analysts," for you new readers). Sales were up 38% from last year and 12% from the immediately prior quarter. Gross margins improved, as did operating margins, and operating income rose by more than 200%. Granting that year-over-year numbers can be a little screwy, I'd point out that sequential operating income growth was on the order of 37%.

The story here is pretty basic and very attractive: The company is trying to migrate further into high-performance analog chips. Why? Well, look at the margins for the likes of Analog Devices (NYSE: ADI  ) or Texas Instruments (NYSE: TXN  ) , and you see a big difference. Intersil wants a piece of that. Look further, at the likes of Linear and Maxim, and you see an even more appealing target. And unlike those two latter companies, where some howlers seem to fear that revenue growth will come at the expense of margins, Intersil should see just the opposite -- better sales and better margins.

I also like the company's capital structure. It has its own fabrication shops to handle proprietary (i.e., high-margin) products, and it can use outsiders such as IBM (NYSE: IBM  ) and TaiwanSemiconductor (NYSE: TSM  ) for the rest. While Intersil has yet to prove the success of this approach (it is a relatively small company), I think it could be a good way to maximize the potential of both internal and outsourced production.

This love note comes to a screeching halt at valuation, though. You have to bake in some rather aggressive numbers to get an attractive target price, and that's just not the way I generally go about valuation. I'd rather be cheap and miss a few good stories than get too aggressive and take losses. So while I'm a big fan of Intersil the company, I'll be holding off on Intersil the stock until I see a better price. That said, it wouldn't surprise me a bit to see enthusiastic investors push this one even higher.

For more high-performance Takes:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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