Stock prices for semiconductor companies may be down across the board, but one thing is looking up for the industry: profits at analog chip makers.
The manufacture of analog semiconductors is an arcane sector of the industry, yet they’re absolutely necessary to many electronics products, especially in the key area of electrical power management. The chips regulate the power used by a product and help keep the battery from draining too quickly.
Analog chip designers command big salaries among electronics engineers, since what they do is often seen as a form of wizardry. Analog expertise is especially desired in the field of wireless technology, since such products require what the industry calls mixed-signal design — that is, a mixture of analog and digital signals.
The biggest analog chip makers in the industry — Texas Instruments, STMicroelectronics, Infineon Technologies, NXP, Analog Devices, National Semiconductor, et al. — are passing familiar to many people. Those companies have diverse product lines, and their bottom lines are occasionally dragged down by the boom-or-bust cycles of the industry. The analog chip market is forecast to hit $40B this year, after a slow year in 2007.
The chip companies that really make major coinage are the ones that are purely analog (or close to it) and I seriously doubt you’ve ever heard of them. Consider Linear Technology. It’s a billion-dollar company, and its profit margins average around 40%. Forty percent! Even Chevron and Exxon Mobil would love to have such hefty profit margins!
Maxim Integrated Products is another one with a fine bottom line. In its recent history, the company’s profit margins have averaged 29% a year. They’ve got catching up to do on their accounting, due to recent problems with backdating stock options, but they should have some fine numbers to show once they do file those 10-Ks, even after expensing the stock options.
Micrel has been around for nearly 30 years, and it’s made money in 28 of those years. Their low public profile may be about to explode, as a hedge fund has taken a sizeable stake in the company, and a proxy fight is possibly brewing.
Romit Shah, an analyst for Lehman Brothers, last week upgraded his ratings on four analog chip makers: Analog Devices, Fairchild Semiconductor International, Intersil, and Microsemi. Shah sees the stock prices of these companies moving up because of their higher margins, net income, and free cash flow.
No telling where the stock prices will go, but look for lots of black ink in financial reports from these and other analog chip makers.
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