This Stock is a Buy Despite Insider Sales

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since November this year, the longtime CEO of Analog Devices (NASDAQ: ADI), Jerald Fishman, has sold company shares in the open market when the share price of this integrated circuits manufacturer reached its 52-week high. The 60,000 shares have been sold at around $40.64 -  $41.12 per share, with a total transaction value of nearly $2.5 million. During the same time, several other insiders have been exercising their options at $19 - $28 per share and simultaneously selling their shares in the open market. Should we follow those insiders and sell Analog Devices? Let’s find out.

Customer Base and Geographical Diversification

Analog Devices, incorporated in 1965, is the global leader in analog, mixed signal, and digital signal integrated circuits, which are used in many types of electronic equipment. The majority of Analog Devices’ revenue has come from two main product categories: Converters (44%) and Amplifiers/Radio Frequency (26%).  Converters are used to convert back and forth between analog signals and digital signals, and amplifiers are used for analog signal conditioning. The company’s products are sold to four main market categories: Industrial, Automotive, Consumer, and Communications. The Industrial segment accounted for the majority of Analog Device's revenue in fiscal 2012 (46%).

It is interesting to note two important points in the business operation: first is the diversification of the customer base. The company was reported to have thousands of customers worldwide, and no single customer accounted for more than 10% of total sales. The largest customer accounted for around 3% of the total fiscal 2012 revenue. Second is the diversification in geographical sales. The two main regions, the US and Europe, each took around 30% of the total revenue. Then came China, with 13%, Japan with 12%, and the rest of Asia with 9% of the total sales.

Fluctuating but Cash-cow Business

In the last 10 years, Analog Devices has experienced quite a fluctuating performance. Sales did not grow much. In 2003, its revenue was more than $2 billion, and in 2012, it grew to only $2.7 billion. However, its EPS was experiencing significant growth during the last 10-year period, from $0.78 in 2003 to $2.13 in 2012.  

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ADI Revenue TTM data by YCharts

In addition, Analog Devices has been generating consistently positive but fluctuating free cash flow in the same period. In fiscal 2012, it generated $815 million in operating cash flow and $682 million in free cash flow. 

Analog Devices’ cash cow machine is backed by a strong, liquid balance sheet. As of October 2012, it booked $4.17 billion in total stockholders’ equity, $3.9 billion in cash and short-term investments, low goodwill and intangibles level, and only nearly $830 million in both long-term and short-term debts. 

Peers performance

In the last five years, semiconductor companies haven't performed so badly. Out of four companies, including Analog Devices, NXP Semiconductors (NASDAQ: NXPI), STMicroelectronics (NYSE: STM), and Texas Instruments (NASDAQ: TXN), only STMicroelectronics generated capital loss for its shareholders. 

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ADI data by YCharts

Looking deeper into the operating metrics of all four semiconductor’s businesses, we can see that Analog Devices is the stock of choice among the four.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>ADI</strong></p> </td> <td> <p><strong>NXPI</strong></p> </td> <td> <p><strong>STM</strong></p> </td> <td> <p><strong>TXN</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>24.11</p> </td> <td> <p>-4.34</p> </td> <td> <p>-8.69</p> </td> <td> <p>13.52</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>13.5</p> </td> <td> <p>-3.64</p> </td> <td> <p>-8.37</p> </td> <td> <p>10.57</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0.2</p> </td> <td> <p>2.8</p> </td> <td> <p>0</p> </td> <td> <p>0.4</p> </td> </tr> <tr> <td> <p><strong>EV/EBITDA</strong></p> </td> <td> <p>10.17</p> </td> <td> <p>9.37</p> </td> <td> <p>13.08</p> </td> <td> <p>8.56</p> </td> </tr> <tr> <td> <p><strong><span>Div</span> yield (%)</strong></p> </td> <td> <p>2.9</p> </td> <td> <p>N/A</p> </td> <td> <p>5</p> </td> <td> <p>2.3</p> </td> </tr> </tbody> </table>

Both NXP and STMicroelectronics are generating losses; in addition, NXP is the most leveraged company and it doesn’t pay out any dividends. STMicroelectronics is paying the highest dividend yields, but the business has been generating losses over the last 12 months, and it is currently valued the most expensive. Texas Instruments is currently profitable, but the net margin is just more than half of Analog Devices’ and its ROIC is also lower.

Foolish Bottom Line

Even though Analog Devices experienced the heavy sales from its CEO, the company's performance has justified the current high price. Analog Devices would be the income stock of choice for an investor's long-term diversified portfolios. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend NXP Semiconductors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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