Maxim Integrated Initiated At Neutral By Goldman Sachs

Goldman Sachs has started coverage of Maxim Integrated Products Inc.

with a Neutral rating and $35 price target due to its outsized exposure to Samsung (SAMSUNG ELECTRONIC KRW5000

). San Jose, California-based Maxim makes linear and mixed-signal integrated circuits catering to various markets including automotive, communications, data center, computing, consumer, and industrial markets. "We view MXIM as one of the few companies in the analog space with room to expand margins through self-help measures, and accordingly we model its margins improving over the coming years. However, we remain sidelined on the stock given risks associated with outsized Samsung exposure and elevated valuation levels," Goldman analysts wrote in a note. The company's long-term gross margin target of 65 percent compares to 2015 levels of 61 percent, with potential for 400bps improvement versus relatively flat margin trends at peers. Specifically, the company plans to grow margins through fab consolidation, opex reductions, and the convergence of depreciation and capex. "As discussed above, we view margin expansion as a significant driver of analog outperformance, and expect investors to reward the company for margin improvements," the analysts said. Despite these positive trends, Goldman remains sidelined on Maxim given its over-indexed exposure to Samsung and smartphone risk. As of the most recent quarter, the company's consumer business accounted for about 30 percent of total sales, and analysts said the bulk of these sales went to Samsung. This outsized exposure to Samsung weakens the argument for "what has traditionally been a hallmark of analog earnings stability, their diverse and broad customer base." "We believe analog investors value earnings stability and accordingly have punished names with elevated handset exposure (e.g., ADI winning AAPL's force touch business). Furthermore, Goldman highlighted that Maxim has disappointed before on Samsung corrections. It recalled, in October 2014, the company guided FY2Q15 EPS about 25 percent below the Street as Samsung worked down component inventory. "Overall we would look for diversification of the revenue mix or even within the consumer customer base to become more positive on the name," Goldman continued. "We see 8.5% downside to our 12-month price target of $35," Goldman added. Shares of Maxim closed Wednesday's regular trading at $38.28.