Goldman Sachs Pairs Trade: Long Maxim, Sell Intersil (MXIM, ISIL)

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Maxim Integrated Products (MXIM) has found itself in a strange predicament over its listing status, but Goldman Sachs doesn’t seem to care.  Maxim (MXIM) is being added to Goldman Sachs’ Conviction Buy List, although it says there is no change to above-consensus estimates or to the 14% projected upside at a $33 price target.  Goldman is adding Intersil (ISIL) to its Conviction Sell List, although it already has a sell rating on the shares.  Goldman is not changing its $29 target with 13% downside.

Interestingly enough, the basis for this call appears to be a pairs trade (arbitrage on price moves) with a LONG MXIM and SHORT ISIL thesis.  It is based upon valuation gaps of nearly 30% on 2008 P/E ratio estimates and a 50% gap on EBITDA projections, despite estimates of 11-13% earnings growth for both.  The 20% underperformance of MXIM along with the delisting are looked at for a reversion.  Solid trends are also noted at both companies, although Goldman Sachs noted that this looks priced in at ISIL based upon positive pre-announced earnings (Goldman believes this is not priced in on MXIM).  There is even a note that a possible market inefficiency exists due to Thomson using GAAP EPS for MXIM and non-GAAP EPS for ISIL.

Jon C. Ogg
October 4, 2007