Morningstar | Maxim's Automotive Chip Growth Remains On Track Despite Near-Term Softness; Maintain $55 FVE
Maxim Integrated reported solid fiscal first-quarter results but provided investors with a soft outlook for the December quarter comparable with those provided by rivals in recent weeks and one that continues the theme of a slowdown in broad-based analog chip demand. Although we were pleasantly surprised that automotive chip sales should be up strongly on both a quarter-over-quarter and year-over-year basis in the December quarter, despite sluggish global vehicle sales in China and Europe in recent months, such revenue growth might be more than offset by especially light sales in the industrial sector, including factory automation equipment and broad-based demand in China.We will maintain our $55 fair value estimate for wide-moat Maxim. After residing in 2-star territory for much of the past two years, we think the recent sell-off in semis has provided investors with a bit of a margin of safety in Maxim's stock today. That said, we see even more attractive investing opportunities in peers like Microchip Technology and Analog Devices today.
Revenue in the September quarter was $638 million, up 1% sequentially, up 11% year over year and just above the midpoint of the firm's guidance of $615 million-$655 million as discussed in July. Automotive chip sales were still healthy, up 15% year over year with notable strength in chips going into battery management systems and active safety systems, continuing the secular theme of rising chip content per vehicle. Industrial chip sales were up 12% year over year with nice ongoing demand in factory automation and medical equipment. Adjusted gross margins were at the high end of the firm's prior guidance at 68.5%, up 50 basis points sequentially.
For the December quarter, Maxim expects revenue in the range of $570 million-$610 million, which, at the midpoint, would represent an 8% sequential decline and a 5% year-over-year decline, but represents flattish growth after adjusting for one-time revenue items last year.
After adjusting for a tough comparison last year when Maxim had a 14 week quarter and a revenue boost from a change to sell-in accounting, sales at the midpoint should be flattish year over year on an apples-to-apples basis and comparable to the flattish year-over-year growth forecast by rival Texas Instruments last week. Maxim's industrial chip business is expected to be down a low single digit percentage year over year on an adjusted basis. The company cited a slowdown in demand later in the September quarter, similar to comments made by TI. Maxim also noted weakness in chip demand from factory automation customers; the firm believes these equipment makers are seeing softer demand as its customers are pausing their factory buildouts because trade wars have raised uncertainty about if, when, and where to build new factories.
For the December quarter, adjusted gross margin is expected to fall 150 basis points sequentially at the midpoint to 67% due to lower sales levels, a less favorable product mix away from chip sales made via distributors and some one-time benefits that boosted Maxim's gross margin a quarter ago. Nonetheless, we still see favorable long-term tailwinds for Maxim in automotive and industrial chip demand. Although a chip industry downturn appears to be on the horizon, we fully expect Maxim's experienced management team to steer the company through these troubled waters. In turn, we think the sell-off in broad-based semis is providing investors with an attractive margin of safety in Maxim's shares (as well as the shares of the firm's peers). We note that Maxim now intends to return 125% of free cash flow to shareholders in 2019, up from its prior target of 100%, with the additional capital allocation coming from stock buybacks as the firm authorized an additional $1.5 billion in share repurchases to its plan. Ultimately, we're aligned with management currently, as we foresee Maxim (and the sector) inevitably recovering from soft near-term demand and resuming long-term, midcycle structural growth.
Maxim Integrated Products designs, develops, manufactures and markets a range of linear and mixed-signal integrated circuits, referred to as analog circuits. The company's linear and mixed signal products serve the Automotive, Communications and Data Center, Computing, Consumer, and Industrial end-markets. The company primarily utilizes third party foundries as well as its own wafer fabrication facilities for the production of its wafers. The company markets its products worldwide through a direct-sales and applications organization and through its own and other unaffiliated distribution channels.
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