A Semiconductor Maker That Could Surge 40%

MAXIM INTEGRATED (MXIM) HAS long been a leader in a crucial type of computer chip, with its products turning up in everything from cellphones and digital cameras to automobiles and factory machinery. And because it often custom-builds its chips for clients, it can charge higher prices than rivals and reap bigger profit margins.

But you'd never know any of that from the company's stock. Delisted from Nasdaq last fall amid a probe into options backdating, it now trades on the Pink Sheets at 18.35, down from 55 in 2004.

Though the investigation ended in December, the company is still in the midst of restating historical financials and does not have audited current data. At the same time, Maxim has been contending with a prolonged downturn in the semiconductor industry.

Now there are signs that the worst may be over. The company, with a market value of $6 billion, has submitted revised financial statements to its auditors. Earnings are expected to pick up next year, as the legal expenses of the probe recede into the past. And conditions in the chip industry could start to improve markedly within a couple of years.

Result: The stock could rocket by more than 40%. The hope is that growth investors, who abandoned the shares over the past couple of years, will start returning in force. What they'll find is a stock that trades at a sharp discount to its peers and boasts $1.2 billion of cash and no debt.

"If this stock isn't $28 in a couple of years, I'd be very surprised," says Jerome Heppelmann, a portfolio manager at Liberty Ridge Capital in Berwyn, Pa., which owns the shares. Most of Maxim 's biggest shareholders are value investors, including stalwart Mutual Series, which sees the shares climbing into the low 30s.

Investing in Maxim is unquestionably a risky proposition, because there is little financial information available. Maxim hasn't reported audited financials since 2005, and it is working to restate earlier results. But full, audited financials may become available by year end, and there's no sign that they'll contain any big surprises.

Progress in resolving the options situation has been slow, but steady. In December, the company settled, without admitting or denying fault, Securities and Exchange Commission charges that it had improperly backdated options and, in the process, overstated profits in fiscal 2003 through 2005.

John Gifford, Maxim's former CEO and founder, agreed to settle charges against himself after paying more than $800,000 in disgorgement, interest and penalties. Only one piece of the SEC's case remains outstanding, against former CFO Carl Jasper. The resolution, whenever it comes, isn't expected to have much impact on the company.

A new management team is already in place to lead the company into a new era. Gifford left Maxim in December 2006 at age 65, with the company citing health reasons for his departure. He was replaced by Tunc Doluca, who joined Maxim in 1984 as a member of the integrated-circuit design-developmental staff and worked his way up to group president, overseeing nine business units that generated more than half of the company's revenue.

Last August, the company tapped Bruce Kiddoo to become CFO after Maxim completes its restatement. He was previously the corporate controller and principal accounting officer at Broadcom (BRCM), where he helped complete that company's options-related restatement of results.

The next step: getting the auditors' blessing on Maxim's restated financials. After options were accounted for, Maxim needed to report $550 million to $650 million of additional noncash compensation expense for fiscal 1997 through fiscal 2006. After tax, that number shrinks to $360 million to $425 million. With audited numbers, the company will be able to once again have its stock listed on an exchange.

"We have made substantial progress toward completion," says Ed Medlin, Maxim's senior counsel. "We are well into the final phase of the project of running our financial and tax models with the auditors." He says that no new accounting issues are being addressed.

Based in Silicon Valley, Maxim specializes in analog chips, which convert sound, light, temperature and other phenomona into electronic signals for digital chips. In the March quarter, 29% of revenue came from the computing market, 27% from consumer electronics, 24% from industrial and 20% from communications.

Maxim is likely to report earnings of $350 million, or $1.06 a share, on $2.05 billion of revenue, for the fiscal year that ended in June. This year, earnings should come in at $1.17 a share, according to the analysts' consensus tallied by Thomson Reuters.