Analog Devices Should get Better with the Economy, Till then Enjoy its Dividend
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If you’re scouting for semiconductor stocks for the long haul, you should put Analog Devices (NASDAQ: ADI) on your watchlist. The maker of integrated circuits has interests across a diverse range of industries, has a solid dividend yield, sits on a pile of cash, and is free cash flow positive. However, its end-markets have been pressured this year due to macroeconomic issues, a fact that reflects in its shrinking revenue and almost flat year-to-date performance.
The last line of the previous paragraph might put you off. In addition, the stock’s current price, which is close to its 52-week high might create another mental barrier in your mind. But if you are ready to invest across economic booms and busts, Analog might prove to be a good choice.
A basic tenet – diversified customers
Along with a diversified business, Analog doesn’t depend on a single customer for a majority of its revenue like many semiconductor companies nowadays. In fact, it doesn’t have any 10% customers on its client list. While depending on a successful smartphone maker might be a really good thing for the stock price, a long-term investor who is looking to invest in a good business would rather opt for customer diversification in order to avoid potential pitfalls.
Take OmniVision Technologies (NASDAQ: OVTI) for example. The company depends on Apple’s (NASDAQ: AAPL) devices for a good chunk of its top line and had to bear the downside last year when Sony grabbed its image sensor spot in some iPhones. As a result, the stock plunged and is almost 35% in the red over the last one year, hardly the type of stock a value driven investor would like.
The next, and the most important, thing is the businesses and end markets where Analog has its interests. The company’s end markets span industrials, communications, automotive, and consumer electronics.
Industrials pegged back, but for how long?
Out of these, the industrial business is the most important as it accounts for almost half of Analog’s revenue. A slowdown in the global economy with chances of a recession in Europe has led to cautious spending by Analog’s customers as they went into inventory de-stocking mode. However, Analog says that its customers believe that their business has almost bottomed out and they don’t see much downside for the rest of the year.
Moreover, the company saw its bookings pick up in July which further indicates towards the possibility of a pickup in business going forward. Also, Analog expects its industrial business to hold steady in the next quarter. And considering that the company supplies its products to companies involved in industrial automation, defense, healthcare and energy, one can expect Analog’s performance to get better along with the economy as spending in these markets improves.
Communications raring to go
Next, we come to the communications business, which makes up 20% of Analog’s top line. It’s well known that infrastructure spending by telecom companies has been sluggish due to economic uncertainty. As a result, equipment manufacturers such as Alcatel-Lucent, ZTE and Ericsson have also been under pressure this year which has in turn affected component suppliers like Analog.
But, Analog managed to swim against the current and grew its communications business 9% sequentially in the just-concluded quarter on the back of new base station deployments in the U.S., Asia and Japan. And the company expects more out of this business in the future. It is counting on 4G infrastructure build outs and its strong position at equipment manufacturers in the U.S, Europe and Asia to drive its top line.
Automotive hits a rough patch
However, Analog’s automotive business, which accounts for 17% of its revenue, has hit a road block. After performing steadily for the first half of the year, the segment took a backseat as the sovereign debt crisis in Europe pegged back car sales. Even then, the segment’s revenue was 12% better than last year and Analog is of the opinion that it can grow this business more. The company cites opportunities in safety systems, energy efficiency and infotainment as drivers for its automotive segment in the long run.
Consumer business looking good
Finally we come to Analog’s consumer business, which contributes 16% to revenue. This segment houses its computing, mobile, home entertainment and portable media businesses. However, this segment was down 19% year-over-year. But going forward, things are looking good for the consumer segment. Analog’s order backlog in the segment grew and it ended the quarter with a book-to-bill ratio above 1.
Analog’s reason for the bright outlook for this segment might be a design win for its micro electro mechanical system (MEMS) microphone in the upcoming iPhone. The company did have a spot inside the iPad 2 for the microphone but lost out AAC Acoustic Technologies in the latest iPad. However, there have been rumors doing the rounds that Analog might again get into Cupertino’s books with the next version of the iPhone which is reportedly set for release pretty soon.
The bottom line
On the whole, it looks like Analog’s performance is analogous with the economy. It might be going through a subdued phase now due but it isn’t doing catastrophically bad in any way. Moreover, the end markets it is involved in will most probably be up to speed once the economy puts itself in a better gear. Till then, an impressive dividend yield of 3% might be good enough for investors who are looking to associate themselves with Analog for the long run.
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