Analog Devices, Inc. (NYSE:ADI)

12/17

Cheap

Low valuation, strong growth, strong margins, dividend growth, increasing need for chips in everyday devices, healthy balance sheet compared to competitors.

Communication in our society is always in demand

valueline!

Analog Devices (ADI) is one of the largest suppliers of analog semiconductors. Analog chips are used to convert ambient data, such as temperature, sound, pressure, even light, into digitized data that can be processed and acted upon by electronic systems. Analog Devices' main products are used for these conversions, and also for amplifying certain signals, particularly voice, that are then transmitted and received around the globe.

If you have a cell phone, some applications of this company's products are readily apparent. Analog-to-digital (and vice-versa) voice conversion is a key component of digital cellular communications, as the data is sent over the air in digital format and "re-created" into sound by devices supplied by ADI and its competitors. Smart-phones require even more analog components, such as an accelerometer that is used to orient the screen to however the user is holding the device, for sensing ambient light to determine screen brightness, and for proximity sensors to determine when to turn off the touch screen when the user is holding the phone to his/her ear. The rapid growth of both smart-phones and tablets is an opportunity for ADI, as the firm is one of the top suppliers of accelerometers.

Analog Devices' largest end market is industrial, which accounts for over 45% of sales. Other important segments are communications (22%), and consumer (19%). The automotive market drives about 12% of sales. If you think about all of the temperature and pressure monitoring systems required for a vehicle or an automated production system, the importance of analog chips becomes apparent. There are a *lot* of applications out there.

At the same time, analog chips are a much better business than commodity digital components. For one, these chips are usually designed into an end product and can not be simply swapped out for a competitor's offering (unlike digital semiconductors). This greatly limits the price elasticity and inventory problems that digital chipmakers face. Second, barriers to entry in this field are relatively high. Analog circuit design is a practical science that takes many years of experience to develop useful skills in, and the pool of exceptional designers is small. Given the relative consolidation in the field (ADI, Texas Instruments (TXN), ST Micro (STM), and Linear Tech (LLTC) are the only major players), this sets up a limited competition oligarchy, a stark contrast to the hundreds of digital component suppliers, many in low-cost locales like Taiwan or China.

The company itself is firing on all cylinders. In the just reported Q1, revenue rose 18% year-over-year, and record high margins drove a 39% increase in operating income. By moving into higher margin businesses, divesting lower margin ones, and cutting back on manufacturing capacity to increase utilization, Analog Devices has raised operating margin from about 25% in 2006 up to over 35% today. This margin should be sustainable for the foreseeable future. To top it off, ADI has a great balance sheet with over $3.4 billion in cash vs. just over $900 million in total debt.

I believe the future for analog chip demand is very bright. Smart-phones, tablets, even laptop computers now carry half a dozen or more sensors. Analog chips are important in efficient power management, a huge concern for mobile devices (although one ADI has not been able to crack into very well, yet). Automobiles continue to be outfitted with ever more sophisticated systems (think park assist, lane assist, blind spot detect - all of which need sensors to function). There should be a significant amount of demand going forward. 2010 and 2011's big step up over 2008 levels probably shouldn't be used as a barometer, as a lot of pent-up demand from a poor 2009 was realized. But there is no reason ADI cannot grow at 10-15% rates over the next few years.

Given this, and assigning a reasonable, historical multiple on the stock, my price target is $49. That represents a 19% upside from current prices - making this an easy stock to assign a positive rating to. Should ADI decline to back around $40, it will also become an attractive candidate for a recommendation.

Filling out my CAPS player with highly-ranked dividend payers.

Stable Dividends Screen

Qualifies for my stable dividends screen

Great products and a great future in their MEMS department, these guys seem to invest properly in their own future. I'll be sticking with them for a while.

ADI's products benefit from teh trends towards digitization of the economy - smart meters, smartphones, etc...digital signals need to be converted to/from analog signals (real world phenomena - eg. sound, video, temperature, etc). So strong mega trends are supporting this stock. They are the global leader in converter technology and their customers are asking them to venture into providing more devices that are complementary to their converters...eg. digital signal processing which further conditions the signal. Power management is also a key area that analog chips can provide - and reducing power consumption is a top objective in every corner of the world these days. With no debt, a lot of cash, good cash flow, and limited competition from China due to the fragmented nature of this market, and customization added to the products by its customers - barriers to entry are higher than other segments of the semiconductor space, and capital expenditures are also less needy given analog manufacturing does not require the most advanced equipment like microprocessors do (think intel). Mgmt has a long tenure at the helm, they know the market well...collect the fat dividend yield and cheap valuation at at PEGY of near 1.0...enjoy the ride. I know I will.

Profile
Analog Devices Inc.
3 Technology Way
Norwood, MA 02062
United States - Map
Phone: 781-329-4700
Fax: 781-461-3113
Website: www.analog.com

Details
Index Membership: S&P 500
S&P 1500 Super Comp
Sector: Technology
Industry: Semiconductor - Broad Line
Full Time Employees: 8,300

Business Summary
Analog Devices, Inc. engages in the design, manufacture, and marketing of analog, mixed-signal, and digital signal processing integrated circuits used in industrial, communication, computer, and consumer applications. The company?s products convert real-world phenomena, such as light, sound, temperature, motion, and pressure into electrical signals. Its products are used in a range of electronic equipment, including industrial process controls, factory automation systems, instrumentation products, energy management systems, defense electronics, automobiles, medical imaging equipment, portable wireless communication devices, cellular base stations, central office networking equipment, computers, digital cameras, and digital televisions. The company sells its products worldwide through direct sales force, third-party distributors, and independent sales representatives, as well as through its Web site. Analog Devices, Inc. was founded in 1965 and is headquartered in Norwood, Massachusetts.

***All above information from YAHOO FINANCE***

Earnings beat

Have owned for many years, been a very good company, would like a few more like this one.

Analog devices has had a good run but there is still room for growth. It's not too late for this Company. This is one of the best Run Semiconductor Company in the market.

Ready to breakout with the semi's. Like the dividend too!

Good products

$1.2 Bil. in Cash, Zero Debt, F P/E 0f 25, Yield of 4%, ROA: 11, ROE: 18

4 - Stars, 10:1 green to red thumbs, near its 52-week low

They make the things that make wireless possible and their products are in everything. When the consumer electronics sector goes up, so will ADI.

ADI shoud outperform over the long term and is relatively cheap.