Devising Investment Advice for Analog Devices

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Analog Devices (NASDAQ: ADI) belongs to the technology sector and, more specifically, the Semiconductor – Integrated Circuits Industry. It designs, manufactures, and markets the analog, mixed-signal, and digital signal processing integrated circuits (ICs) which are used in a wide range of electronic equipment and energy management systems including aerospace and defense electronics. Its fourth quarter results showed weakness across the board with revenues decreasing by 9.8% for the year and the gross margin by 52 basis points (bps) year over year (yoy).

Into the Numbers

Analog Devices, Inc. reported fourth quarter earnings per share of $0.58.

The communications segment of the company now constitutes infrastructure sales alone. This business should continue on an uptrend, since there is great focus on 4G and LTE by leading phone makers, such as Samsung and Apple, Analog Devices has offerings for both the traditional and 4G networks.  Moreover, it has higher content in the 4G segment, which along with its position as one of the leading Original Equipment Manufacturers should have a positive impact on its revenue.

The automotive segment generated around 16% of Analog Devices’ fourth quarter revenue, down 3.9% sequentially and 2.0% from the year-ago quarter. This has resulted from a drop in demand in Europe due to weaker sales and more factory shut-downs there.

Analog Devices generated a pro forma gross margin of 63.8%, down 179 basis points (bps) sequentially, 52 bps year over year and short of management’s gross margin expectation of 65%. The primary reason for the gross margin decline was the change in sales mix, which favored lower-margin products in the last quarter. However, management also decided to reduce production to align inventories with demand, which had the utilization rate dropping from 74% in the July quarter to 67% in the last quarter. Moreover, there has been very significant operating expense controls by the company, the operating expenses have been roughly flat in the last two years despite massive fluctuations in revenue. Moreover,  there were no special charges relating to restructuring activities in the last quarter which has resulted in a massive reduction in the company’s operating expense.

The fully diluted pro forma earnings per share were 58 cents compared to 56 cents in the previous quarter.

Future Estimates

Analog devices expects its earnings to range between $0.45 to $0.49 and revenue to range between $632 million to $673.70 million in the next quarter.

ADI also announced that the Board of Directors has declared a cash dividend of $0.30 per outstanding share of common stock. The dividend will be paid on Dec. 18 to all shareholders on record at the close of business on Dec. 7.

Areas of Concern

Its major competitors are:

  • NXP Semiconductors NV (NASDAQ: NXPI)
  • STMicroelectronics NV (NYSE: STM)
  • Texas Instruments Inc. (NASDAQ: TXN)

Analog devices reported a quarterly revenue growth of -0.03% on year over year basis whereas NXPI reported 0.1%, STM -0.11%, and TXN -0.02%. So we see that NXPI reported the highest growth amongst them. NXPI is also expected to strengthen cooperation for Future Generations of Implantable Hearing Solutions with Cochlear; this will lead to development and supply of ultra-low power miniaturized solutions for speech processing, wireless connectivity and non-volatile storage which is a very positive factor for the future.

STMicroelectronics and 3H cooperate to develop solutions for Broadcast and Broadband Digital TV for inner Mongolia. This will make use of STM’s latest generation of cost-effective entry-level HD cable product, the StiH271EL, and will result in growth providing consumers with a best-in-class user experience at affordable prices. Company management has announced that they will present the company’s new strategic plan on Monday, Dec. 10 before the European stock markets open. In 2011, STMicroelectronic's net revenue was $973 million, in comparison to ADI’s revenue of $695 million.

Texas Instruments introduced its newest DaVinci™ video processors. The DaVinci™DM385 video processor with superior low-light technology allows cameras to be placed in especially dark environments, to produce more distinct, high quality, life like crisp images which will be useful in solving any crime.

Analog devices reported EPS (ttm) of $2.13, whereas NXP Semiconductors reported -$0.73, STMicroelectronics reported -$0.84, and Texas Instruments reported $1.52.So we see that analog devices has reported the highest EPS (ttm) amongst the four companies.

My Take

Analog Devices has a significant percentage of its revenue coming from the industrial and automotive markets, both of which are expected to remain sluggish in the near term and the company is as well expecting a sharp reduction in its consumer revenue, which will make matters worse. Overall orders decreased during the current quarter which are estimated to reduce further in the upcoming quarter. To overcome this, the company has reduced and will continue to reduce its production levels in the upcoming quarter as well. All this will reduce its gross margins in the short term, it is estimated that these measures will provide significant operating leverage when growth resumes. Therefore we can conclude that Analog Devices does not seem to be a good investment target. In fact, companies with industrial and automotive focus are unlikely to do very well in this environment. 

 


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