Maxim May Not Be the Best Choice

Everyone wants high performance. Whether it's a car, a vacuum cleaner, or bathroom cleanser, slap "high performance" on your packaging, and you stand a fair chance of better sales.

So what about high-performance analog chips? Is that a place where investors can look for better sales this year? Based on what we've heard from the likes of Linear Technology (Nasdaq: LLTC  ) and now Maxim Integrated (Nasdaq: MXIM  ) , the answer could be a cautious yes.

To be sure, business isn't exactly roaring again at Maxim just yet. Revenue was up all of 2% over last year's second quarter, though bookings were up 10% from the first quarter. Profitability got smacked, though, as operating profit (under generally accepted accounting principles) fell 26%, and net income dropped 22%.

One cause for concern here would be the gross margin line. On a GAAP basis, gross margin fell to 68.2% from 72.6% a year ago. That's going to worry some because there have been suggestions or fears going around for a little while now that Maxim would have to sacrifice margins to maintain growth. While companies like Linear and Maxim have maintained very high margins (by industry standards) by focusing on high-performance products, there is the fear that lower-margin interlopers like Intersil (Nasdaq: ISIL  ) will threaten that arrangement.

In Maxim's defense, there's a lot in its favor. It is well-positioned in important markets like power management and data conversion, and it has a solid presence in telecommunications. It has been able to grow despite the efforts of competitors like Analog Devices (NYSE: ADI  ) and Texas Instruments (NYSE: TXN  ) , and Maxim has a business model that generates very good returns on capital.

I still believe that well-chosen semiconductor stocks will outperform in 2006, but that's certainly not an indiscriminate recommendation. Although lower margins and higher inventory concern me a little, that's not my main issue with Maxim right now. Put very simply, I just think that Linear is about as good as Maxim, but a little bit cheaper.

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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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