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Here is a look at how Analog Devices Inc, (ADI) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value$62.67
MG OpinionFairly Valued
Value Based on 3% Growth$32.00
Value Based on 0% Growth$18.76
Market Implied Growth Rate6.78%
Net Current Asset Value (NCAV)$12.31
PEmg22.06
Current Ratio9.59
PB Ratio3.19

Balance Sheet - 10/31/2013

Current Assets$5,472,400,000
Current Liabilities$570,500,000
Total Debt$872,200,000
Total Assets$6,381,800,000
Intangible Assets$312,700,000
Total Liabilities$1,642,200,000
Outstanding Shares311,050,000

Earnings Per Share

2013$2.14
2012$2.13
2011$2.79
2010$2.33
2009$0.85
2008$1.77
2007$1.51
2006$1.48
2005$1.08
2004$1.45
2003$0.78
2002$0.28

Earnings Per Share - Modern Graham

2013$2.21
2012$2.15
2011$2.06
2010$1.66
2009$1.33
2008$1.53

Conclusion:

Analog Devices, Inc. is a solid company for the Enterprising Investor, having passed all five of the requirements. The company does not qualify for the Defensive Investor because it currently trades at high PEmg and PB ratios, but Defensive Investors should keep the company on the watch list to see if those ratios improve sufficiently. From a valuation perspective, the company has achieved a moderate level of growth, with EPSmg (normalized earnings) going from $1.53 in 2008 to $2.21 in 2013. This is not a substantially high level of growth, but it does support the market's implied estimate of 6.78%. As a result, the company appears to be fairly valued at this time, and Enterprising Investors should feel comfortable proceeding with further research to determine whether the company is fit for their individual portfolios.

Disclaimer: The author did not hold a position in Analog Devices, Inc. at the time of publication and had no intention of entering into a position within the next 72 hours.

Source: ModernGraham Valuation Of Analog Devices