Maxim (MXIM) Up 12.5% Since Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Maxim Integrated Products, Inc. (NASDAQ:MXIM). Shares have added about 12.5% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to its next earnings release, or is MXIM due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Maxim Beats Earnings and Revenue Estimates in Q2

Maxim reported second-quarter fiscal 2018 adjusted earnings of 65 cents per share, surpassing the Zacks Consensus Estimate by a penny. Also, earnings increased 9% sequentially and 42% from the year-ago quarter.

Revenues

Revenues of $623 million increased 8.2% sequentially and 13% year over year. The increase was driven by major strength in the automotive and industrial end markets.

The top line was within the company’s guidance range of $600-$640 million and came in above the Zacks Consensus Estimate of $620 million.

Revenues by End Market

The revenue mix in terms of major markets is discussed below.

The Industrial end market remained the largest revenue contributor, accounting for approximately 29%. The segment’s revenues increased year over year, driven primarily by factory automation products.

Consumer, Maxim’s second-largest segment, also generated 26% of the revenues, declining year over year. The decrease was due to weak demand for smart phones, partially offset by growth in broad-based consumer business in wearables, tablets, peripherals, and gaming products.

The Communications and Data Center end market accounted for 20% of the revenues, flat from the year-ago quarter. The robust growth of 100G optical products and 12-volt server power used in high-speed data center applications was offset by broad-based softness in communications infrastructure.

The Automotive end market generated 21% of revenues. The segment’s revenues grew in the double digits year over year. The increase was driven by growth in infotainment content. Power management products for infotainment applications helped in strengthening customer relationships in automotive and earning new design wins.

The Computing business contributed the remaining 4%.

Margins

Non-GAAP gross margin was 67.6%, up 70 basis points (bps) sequentially and 350 bps year over year. The increase was due to higher revenues, a favorable mix and strong operational execution.

Non-GAAP operating expenses of $201.2 million increased 10.4% year over year. The increase was due to an extra week included in the quarter. As a percentage of sales, research and development expenses decreased, while selling, general and administrative expenses increased.

Operating margin was 35.3%, up 430 bps year over year. The improvement was driven by revenue growth and manufacturing transformation.

Balance Sheet & Cash Flow

During the reported quarter, cash flow from operations was $229.9 million compared with $220 million in the earlier quarter. Important usages of cash in the quarter included $22.4 million on capex, $77 million for share repurchases and $101.4 million paid as dividends.

Total cash, cash equivalents and short-term investments were $2.82 billion in the fiscal second quarter, up from $2.77 billion in the earlier quarter.

3Q Guidance

For the fiscal third quarter, Maxim expects revenues in the range of $620-$660 million based on a quarter-end backlog of $446 million.

Gross margin is expected in the range of 66-68% on an adjusted basis (excluding special items). Earnings per share are expected in the range of 66-72 cents on an adjusted basis.

Going Forward

For the upcoming fiscal third quarter, the company expects the automotive market to grow well above the seasonal, driven by continued growth in battery management system business. The industrial market will be up sequentially and from the year-ago quarter, driven by strength from factory automation content. Also, the Communications and Data Center market is likely to be up in the upcoming quarter. However, Consumer revenues are expected to increase in the March quarter, driven by above average peak shipments for smart phones.

Maxim’s automotive business has been growing lately. The company has invested heavily in vehicle-safety technology that could prove to be foundational for a driverless car future. During the fiscal second quarter, the company entered into a partnership with NVIDIA Corporation (NASDAQ:NVDA) to support the latter’s DRIVE Pegasus as well as DRIVE Xavier for Level 4 driving platforms.

Maxim remains financially strong with convincing margin expansion opportunities through its cost-saving initiatives and R&D focus on high-return investments.

The company is expanding its manufacturing footprint to enhance flexibility and profitability, while lowering capital expenditure. Management also plans to optimize product lines and organization for better returns on R&D investments. These efforts are likely to enable Maxim in improving future utilization rates, reducing costs and improving gross-margin performance.

Maxim is shifting to advanced node process technology development through a recent collaboration with its foundry partners. Products launched under this initiative should expand margins.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last month as none of them issued any earnings estimate revisions.

Maxim Integrated Products, Inc. Price and Consensus

Maxim Integrated Products, Inc. Price and Consensus | Maxim Integrated Products, Inc. Quote

VGM Scores

At this time, MXIM has a nice Growth Score of B, though it is doing a bit better on the momentum front with an A. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for momentum investors than those looking for growth and value.

Outlook

MXIM has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.