Keep an Eye on This Stock

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

Companies with interests across diversified industries aren’t generally harmful for any portfolio. But when the economy isn’t in the pink of health and spending is muted, the performance of such stocks might become frustrating. The same is true with broad-based semiconductor companies, who haven’t done too well in 2012.

Take Texas Instruments (NASDAQ:TXN), for example. The stock’s return this year is in low single-digits and its near-term outlook suggests that it is in for some tough times. It recently lowered the higher end of its revenue forecast for the fourth-quarter, while also announcing that it would eliminate around 1,700 jobs to cut costs.

But having diversified semiconductor stocks lends stability to a portfolio. This is why having a “generalist like TI” in yours might be a good idea since the stock is positioned to do well in the future as Fool analyst Anders Bylund told us last month.

Another one to consider

Hence, in my opinion, you should take a look at another semiconductor player whose chips are used across a range of industries and has had a pretty decent year as well. Analog Devices(NASDAQ: ADI) year-to-date return of almost 21% has taken the stock very close to its 52-week high, even though the company saw its annual revenue go down by around 10% in FY12.

In addition, its outlook for the ongoing quarter isn’t too great either, as Analog expects revenue to decline in the range of 6% to 12%, along with earnings which are way behind consensus estimates. All this might lead you to think that the stock is already quite richly valued and might offer little upside, considering that it’s close to its 52-week high and is pressurized by macro weakness.  

In such circumstances, it might become difficult for the company to replicate its performance in 2013 as investors could book profits, creating more pressure on the stock. However, that’s when the opportunity would arise for potential investors to get into the stock, and they should consider buying it on dips. After all, a diversified base of customers, a strong balance sheet, solid cash generation and a dividend yield of 2.8% tell us that Analog Devices has strong fundamentals.

Patience should pay off

The company’s near-term outlook might be sluggish, but its end-markets should take it to new highs when the economy is back in gear. Analog supplies chips to the industrial market for use in applications across instrumentation, automation, defense, and energy, and these account for about 44% of its top line. Revenue from this segment declined in the previous quarter due to cautious spending and isn’t expected to bounce back any time soon.

However, the fact that Analog counts a wide array of industrial equipment customers, ranging from small to big, on its client rolls is a positive since orders would start flowing in once spending resumes. Same goes for its automotive business, which accounts for 16% of total revenue and also declined 2% from last year. But it should be noted that spending in these markets is largely driven by the overall economic conditions, and hence they should improve once the current economic cycle passes.

The growth drivers

On a brighter note, the communications and consumer businesses, which together account for 40% of Analog’s revenue, are on an upswing. The communications business is slated to get better going forward as telecom companies build faster networks. Moreover, Analog’s consumer business has been growing at a good pace, jumping around 26% in the previous quarter.

It is rumored that Analog has provided one of the MEMS microphone to Apple (NASDAQ: AAPL) for the iPhone 5. According to Forbes, the company makes $1 or $2 on every unit of the new iPhone. The iPhone 5 got off to a great start and is probably selling in huge quantities, enabling Apple to grab more than half of the U.S. smartphone market, and this in turn is a positive for Analog Devices.

The bottom line

A major portion of Analog’s business is not running at full steam now due to macroeconomic weakness while about 40% of is growing well. But, as I have already said, Analog Devices should get back on track when the economy improves and spending resumes. When that happens, all of the company’s businesses would be running on full thrusters and take the stock higher. Till then, you should keep a close eye on the stock, take advantage of any dips in the stock price and enjoy returns in the long run.

TechJunk13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. 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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