Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q18 Earnings Update
Prev. Ed.: Dec 20, 2017: 4Q17 Earnings Update
Brokers’ Recommendations: Positive: 79.2% (19 firms); Neutral: 20.8% (5 firms); Negative: 0.0% Prev. Ed: 13, 7, 0
Firms’ Target Price: $103.67 (↑$3.34 from last edition; 18 firms) Firms’ Avg. Expected Return: 13.6%
Note: Though dated Apr 4, 2018, the data in the tables below are as of Mar 6, 2018.
Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet model.
Portfolio Summary
Analog Devices (ADI) is a semiconductor manufacturer specializing in high-performance analog, commodity analog and digital signal processor (DSP) semiconductors. The company is highly diversified in terms of customer base and end markets.
Competition: The analog market is highly fragmented with the top five players accounting for about half the market share and none with more than 20%. There are several barriers to entry, which makes it difficult for new entrants. The average selling price (ASP) of an analog chip is about $1.00. As a result, a successful product may generate only a few million dollars of sales each year. Thus, the companies need to have a broad portfolio. Analog chips are highly customized and require different manufacturing processes that have been fine-tuned over decades. Moreover, these circuits are largely designed by hand and analog talent is hard to find. It can take several years of experience before a new engineer can become productive. Most students are attracted to digital design where learning curves are shorter and initial salaries are higher. Key analog providers include Texas Instruments Inc. (TXN), Maxim Integrated Products Inc. (MXIM) and Linear Technology Corp. (LLTC).
Analyst Opinions: Of the analysts in the Digest group covering the stock, 79.2% were positive and 20.8% were neutral. There was no negative rating on the stock. Most of the analysts applied P/E multiples to compute their target prices, which range from a low of $85.00 to a high of $122.00, with the average being $103.67. The expected return on the current share price is 13.6%.
Bullish (Buy or equivalent outlook): 19 analysts or 79.2%: These firms believe that Analog Devices is poised to grow, given the large and growing analog market. They believe that growth will be aided by increasing demand for analog content in the computing space due to a strong shift toward Internet of Things (IoT) applications and parallel processing. The firms are positive about Analog Devices’ strong position in the analog semiconductor market. They believe that the company along with Linear Technology and Hittite Microwave is well positioned to develop innovative products to meet the demand in industrial, automotive, healthcare and IoT areas. Hence, the analysts are bullish about the company’s top-line growth. Further, the improving aerospace & defense and industrial automotive market remain positive for the strong performance industrial end market. In addition to that, they are bullish on the wireless sector in communication end market with 5G base stations across the world. The firms believe Analog Device’s business model is poised to grow due to its wide exposure to diversified end markets and plenty of cash generation opportunities in the industry. The analysts are also encouraged by the company’s solid balance sheet, positive cash flow and optimum debt ratio that represent itssound financial position.
Cautious (Neutral or equivalent outlook): 5 analysts or 20.8%: These firms are cautious because almost 50% of the company’s sales come from industrial end-markets that are mature and slow growing. So they remain skeptical about the rate of sales growth in this market. The firms are also aware of seasonality that prevails in the consumer segment and intensifying competition from peers such as Texas Instruments and reduction in worldwide semiconductor demand due to economic weakness. As a portion of Analog’s production is internal, it can result in creating a potential fixed cost burden when demand is poor, thereby dampening financials of the company. Further, the firms believe that a large push out in 5G station builds and a significant fall in consumer business are matters of concern. Delayed product introductions and difficulties in manufacturing in this industry remain headwind. These firms also remain skeptical about the extent of success of the acquisition of Linear Technology. However, they believe that the company is well positioned to deal with these situations and deliver high returns, expanded margins and profitable growth over the long term. Moreover, they believe that increasing demand for Linear Technology’s product, lower financial leverage and significant cost savings will continue to benefit the company. Additionally, EPS will also benefit from the new tax reform.
The firmsare also concerned about ongoing economic weakness that may have a negative impact on the global semiconductor demand thereby hampering the company’s growth.
Apr 4, 2018
Overview
Massachusetts-based Analog Devices Inc. (ADI) designs, manufactures and markets high-performance analog, mixed-signal and digital-signal processing integrated circuits (ICs), used in signal processing for industrial, communication, computer and consumer applications. Its products convert real world phenomena such as temperature, motion, pressure, light and sound into electrical signals to be used in a wide array of electronic equipment, like industrial process control, factory automation systems equipment, defense electronics, base stations, central office equipment, wireless telephones, computers, automobiles, computer-aided tomography (CAT) scanners, digital cameras and digital versatile disc (DVD) players. The company has manufacturing facilities in Massachusetts, California, North Carolina, Ireland and the Philippines. Further information on the company is available on its website:
On Mar 13, 2011, Analog Devices announced that it will be transferring its stock exchange listing to the Nasdaq Global Select Market from The New York Stock Exchange. Analog Devices’ shares have been trading under the symbol “ADI” effective Apr 2, 2012.
The firms identified the following key factors for evaluating the investment merits of Analog Devices:
Key Positive Arguments / Key Negative Arguments- LLTC Acquisition: The acquisition of Linear Technology is expected to have a positive impact on Analog Devices’ top and bottom line.
- Product Mix: The company has benefited from a positive shift toward high-end data converters, amplifiers and other analog products. A dominant market position and underlying franchise strength make Analog Devices a compelling investment option.
- Strong Cash Position: Analog has a proven ability to reach profitability, entrenching its status as a successful turnaround story.
- Return to Investors: ADI is committed to returning 80% of its FCF (vs. 60% historically) to shareholders over the next five years.
- Sustainability of Growth: Analysts believe that any significant operational misstep or broad equity market declines could lower the stock’s valuation significantly.
- Pricing Pressures: The company’s margins are often affected by shifts in product mix and thus, significant internal mix changes or the external pricing environment could affect sales and margins. Further, sudden fall in consumer spending is also a deterrent.
- General Risks: As a global semiconductor supplier, Analog Devices relies on sales in many regions and therefore faces economic, political and other risks in those areas.
- Uncertainty in Orders: Customer order trend including excessive double ordering, inventory, stockpiling or excessive cancellations could lead to actual sales differing from projections and also put pressure on pricing and margins.
Note:The company’s fiscal year ends on Oct 31; fiscal references differ from the calendar year
Apr 4, 2018
Long-Term Growth
The semiconductor industry is a large and diverse market. While the overall semiconductor industry is laden with immense capital costs, rapid product obsolescence, and intense competition, analog semiconductors tend to exhibit more stable economic characteristics. Analog industry is expected to witness a secular and cyclical tailwinds over the next five years due to strong demand anticipated from various end markets including automotive, industrial and wireless communication. The analysts are bullish on industrial segment’s growth in the long run due to strengthening environment in aerospace & defense, medical and factory automation. Thus, the company will continue to generate substantial revenues from this segment. They are also optimistic about the communications sector as the 5G base station builds are likely to drive growth. Hence, Analog Devices will continue to generate free cash flow in the long run as it is likely to benefit from longer product life cycles, favorable price competition, long-term investments, expanding margins and diversified customer base.
The analog segment of the semiconductor industry includes specialized types of chips that change real-world signals such as sound, temperature, pressure into images, and used in the communications, computing, industrial, consumer and automotive markets. Demand for analog chips is expected to be driven by the increased usage of semiconductor components in new applications, such as televisions, household appliances, medical imaging devices, and automobiles. In addition, increased adoption of portable electronics is expected to augment the need for extended battery life, lower heat dissipation, and lower power consumption in electronic devices. Analog chips, particularly power management components, are critical in providing this efficient distribution of energy within electronic systems. With its focus on analog semiconductors, Analog Devices is well-positioned to benefit from strong growth.
The company continues to benefit from a positive shift toward high-end data converters, amplifiers and other analog products. This exposure has helped the company to maintain strong margins in spite of declining sales, according to analysts. Moreover, the company has a broad product portfolio, which includes digital cameras, wireless communications, automobiles, set-top boxes and medical imaging.
Last year’s acquisition of Linear Technology has increased its market share from 7% to 10% and created an analog industry leader across a huge range of products, customer breadth and scale. The deal expanded Analog Devices’ total addressable market allowing it to tap the phenomenal demand in some of the most attractive markets, namely industrial, automotive, and communications infrastructure markets. The company has also leveraged Linear’s power management products on its own converters and amplifiers. Firms believe that going forward, the company will be able to expand the reach of Linear’s products through its global sales force and greater than expected accretion from Linear’s acquisition.
Apr 4, 2018
Target Price/Valuation
Provided below is a summary of valuation and ratings as compiled by Zacks Digest Research:
Rating DistributionPositive / 79.2%↑
Neutral / 20.8%↓
Negative / 0.0%↑
Average Target Price / $103.67↑
Digest High / $122.00↑
Digest Low / $85.00
No. of Firms with Target Price/Total No. of Firms / 18/24
Risks to the target price include failure to integrate Linear Technology, economic weakness, growing competition, higher turns, order requirements, postponement of product development, lower demand for analog products and systems and cyclical pressure on the entire semiconductor industry.
Recent Events
On Mar 8, 2018, Analog Devices announced the buyout of privately held Munich based, Symeo GmbH, which specializes in developing and manufacturing telemetry solutions with RF data transmission. The deal will allow the company to offer enhanced RADAR solutions to its customers.
On Feb 28, 2018, Analog Devices raised dividend payout by 7% to 48 cents per share. The dividend will be paid on March 20 to shareholders of record Mar 9, 2018.
On Feb 28, 2018, Analog Devices announced fiscal 1Q18 financial results. Highlights are as follows:
- Total revenues were $1.52 billion, decreased nearly 1.5% sequentially but up 54.3% year over year.
- Cash and short-term investments balance was approximately $827.6 million, down from $1.05 billion at the end of the prior quarter.
Revenues
According to the press release, Analog Devices generated revenues of $1.52 billion in 1Q, declined 1.5% sequentially although increased massively 54.3% y/y. The increase can be attributed to robust performance from industrial, automotive and communications end-markets.
Moreover, revenues came close to the higher end of the guided range of $1.44 billion to $1.54 billion.
Provided below is a summary of total revenue as compiled by Zacks Digest:
Revenues ($ in million) / 1Q17A / 4Q17A / 1Q18A / 2Q18E / 3Q18E / 2017A / 2018E / 2019EDigest High / $984.4 / $1,541.2 / $1,519.0 / $1,470.1 / $1,550.0 / $5,108.0 / $6,189.0 / $6,650.0
Digest Low / $984.4 / $1,541.0 / $1,518.6 / $1,470.0 / $1,466.0 / $5,107.5 / $5,968.7 / $6,087.0
Net Sales / $984.4 / $1,541.2 / $1,518.7 / $1,470.0 / $1,494.0 / $5,107.6 / $6,047.2 / $6,324.8
Y/Y Growth / 27.9% / 56.3% / 54.3% / 28.1% / 4.2% / 49.3% / 18.4% / 4.6%
Q/Q growth / -1.9% / 7.5% / -1.5% / -3.2% / 1.6%
Revenues by End Markets
The Industrial market generated revenues of $743.6 million (49% of Analog Devices’ total revenues), up 4% sequentially and 87.4% y/y. Communications generated revenues of $284.3 million (18.7% of total revenues), up 4.1% sequentially and 63% y/y. The Automotive segment generated $252.2 million of revenues (16.6% of Analog Devices’ revenues), up 5.1% sequentially and 76.4% y/y. The Consumer segment brought in $238.5 million (15.7% of total revenues) increased 23.8% sequentially and 11.8% y/y.
Provided below is a summary of total revenue as compiled by Zacks Digest:
Revenues ($ in million) / 1Q17A / 4Q17A / 1Q18A / 2Q18E / 3Q18E / 2017A / 2018E / 2019EIndustrial / $401.5 / $720.2 / $743.7 / $2,406.1
Automotive / $138.6 / $235.2 / $252.1 / $798.4
Communications / $174.0 / $272.3 / $284.3 / $927.2
Consumer / $270.4 / $313.3 / $238.6 / $1,061.1
(Note: Blank cells represents brokers have not provided estimates)
Guidance
For 2Q18, management expects revenues in the range of $1.43 billion to $1.51 billion.
Firms’ Outlook
Firms expect sustainable long-term revenues/earnings growth for the company driven by improved revenue synergies. They believe that Analog Devices’ long-term growth drivers are Industrial, Communications Infrastructure and Automotive business. In fact, with its focus on analog semiconductors, the company is well positioned to benefit from strong growth in this domain. A few expect the consumer business to remain lumpy.
Margins
Non-GAAP gross margin was 71%, up 20 basis points (bps) sequentially and 500 bps y/y.
Adjusted operating expenses as percentage of revenues declined 180 bps from the year-ago quarter but increased 110 bps sequentially to 29.4%. Non-GAAP operating margin of 41.7% expanded 670 bps y/y but contracted 90 bps sequentially.
Provided below is a summary of GAAP margins as compiled by Zacks Digest Research:
Margins / 1Q17A / 4Q17A / 1Q18A / 2Q18E / 3Q18E / 2017A / 2018E / 2019EGross / 66.1% / 70.9% / 71.1% / 71.2% / 71.1% / 69.5% / 71.1% / 71.3%
Operating / 35.0% / 42.6% / 41.7% / 41.6% / 41.3% / 39.5% / 41.6% / 42.6%
Pretax / 32.3% / 38.3% / 37.3% / 37.6% / 37.5% / 35.2% / 37.7% / 39.2%
Net / 29.9% / 35.0% / 35.0% / 34.9% / 35.0% / 31.9% / 35.3% / 34.5%
*Note: Blank cells indicate figures are not available
Guidance
For 2Q18, on a non-GAAP basis, the company estimates gross margin of approximately 71% to 71.5%. Operating expenses are expected to be between $430 million and $440 million. Analog Devices expects interest and other expense of approximately $60 million.
Firms’ Outlook
The majority of the firms believe that an improved mix and higher utilization rate would help Analog Devices’ gross margin to increase steadily through 2018. Additionally, they anticipate the company’s focus on high-margin markets including industrial, automotive and communications to be favorable.
Please refer to the Zacks Research Digest spreadsheet on ADI for more details on margin estimates.
Earnings per Share
According to the press release, pro forma EPS came in at $1.42, which surged 51.1% y/y but declined 2.1% sequentially. The figure came well ahead of the guided range of $1.20-$1.36.
Provided below is a summary of EPS as compiled by Zacks Digest Research:
EPS / 1Q17A / 4Q17A / 1Q18A / 2Q18E / 3Q18E / 2017A / 2018E / 2019EDigest High / $0.94 / $1.45 / $1.43 / $1.38 / $1.47 / $4.73 / $5.84 / $6.17
Digest Low / $0.94 / $1.45 / $1.42 / $1.35 / $1.35 / $4.67 / $5.53 / $5.51
Digest Average / $0.94 / $1.45 / $1.42 / $1.37 / $1.40 / $4.70 / $5.68 / $5.77
Y/Y Growth / 67.5% / 37.9% / 51.2% / 32.5% / 10.7% / 53.1% / 20.7% / 1.6%
Q/Q Growth / -10.6% / 15.0% / -2.0% / -3.8% / 2.1%
Guidance
For 2Q18, management expects EPS in the range of $1.30 to $1.44.
Analyst / Shilpa MeteCopy Editor
Content Ed.
QCA / Aniruddha Ganguly
Reason for Update / 1Q18 EarningsUpdate