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Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Analog Devices Inc. fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Analog Devices, Inc. (Analog Devices) (NASDAQ:ADI) is engaged in the design, manufacture and marketing of a range of analog, mixed-signal and digital signal processing integrated circuits (ICs). The company has focused on solving the engineering challenges associated with signal processing in electronic equipment. The company’s signal processing products play a fundamental role in converting, conditioning, and processing real-world phenomena, such as temperature, pressure, sound, light, speed and motion into electrical signals to be used in a wide array of electronic devices. As new generations of digital applications evolve, new needs for high analog signal processing and digital signal processing (DSP) technology are generated. In November 2013, Analog Devices, Inc completed the sale of the assets of its microphone product line to InvenSense, Inc.

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ADI Chart

ADI data by YCharts

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

Key Data:

Recent Price $51.52
MG Value $43.10
MG Opinion Overvalued
Value Based on 3% Growth $32.59
Value Based on 0% Growth $19.10
Market Implied Growth Rate 7.21%
Net Current Asset Value (NCAV) $12.37
PEmg 22.92
Current Ratio 10.53
PB Ratio 3.36

Balance Sheet – 2/1/2014

Current Assets $5,471,000,000
Current Liabilities $519,500,000
Total Debt $872,400,000
Total Assets $6,399,500,000
Intangible Assets $311,700,000
Total Liabilities $1,603,800,000
Outstanding Shares 312,530,000

Earnings Per Share

2014 (estimate) $2.17
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

Earnings Per Share – ModernGraham

2014 (estimate) $2.25
2013 $2.21
2012 $2.15
2011 $2.06
2010 $1.66
2009 $1.33

Dividend History

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ADI Dividend Chart

ADI Dividend data by YCharts

Conclusion:

Analog Devices is suitable for the Enterprising Investor but not the Defensive Investor. The Defensive Investor is turned away by the company’s high PEmg and PB ratios, while the company passes all of the requirements of the Enterprising Investor. As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a review of ModernGraham’s valuation of Texas Instruments (NASDAQ:TXN) and 5 Low PEmg Companies for the Enterprising Investor. From a valuation standpoint, the company appears to be overvalued at the current time, after growing its EPSmg (normalized earnings) from $1.66 in 2010 to an estimated $2.25 for 2014. This is a level of historically demonstrated growth that lags behind the market’s implied estimate of 7.21% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls below the market price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Analog Devices Inc. Where do you see the company going in the future? Is there a company you like better?

Disclaimer: The author did not hold a position in Analog Devices Inc. (ADI) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

Source: ModernGraham Quarterly/Annual Valuation Of Analog Devices Inc.