Add the name Analog Devices (NASDAQ:ADI) to the list of semiconductor companies that are breaking to new highs. Although the Massachusetts-based company doesn't get mentioned to the extent of its West Coast semis, namely Nvidia (NVDA) and Advanced Micro Devices (NASDAQ:AMD), Analog Devices - which makes analog, digital and mixed-signal processors for industrial and consumer electronics markets - is crushing it in terms of execution.
Thanks to its strong second quarter results Wednesday, the company has now logged nine straight earnings beats in a row, while its revenue beat streak has just been extended to eleven. So, although ADI shares - up 25% year to date - aren't the bargains they were six months ago, these shares should reach $110 in the next 12 to 18 months, delivering some 23% returns.
At around $89 per share, ADI stock is priced at just 18 times fiscal 2018 estimates of $4.69 per share. This compares with a forward P/E of 42 for Nvidia and a 37 P/E of Advanced Micro Devices. And just applying an extra three points to ADI's 2018 estimates, a conservative upgrade, puts ADI stock at around $110. Good luck finding a chip stock that is growing the top line at 40% but is yet discounted to the extent of Analog Devices. Let's go through the numbers.
ADI shares are up more than 5% Wednesday after the company reported net income of $93.6 million, or 27 cents per share. While that marked a decline from $170.6 million, or 55 cents per share, a year ago, it came to $1.03 on an adjusted basis. Not only did that crush Wall Street's estimates of 84 cents by a hefty margin, it makes a year-over-year earnings growth of 61%.
Aside from the fact that ADI pays strict attention to operating expenses, the company's earnings growth was buoyed by its well-timed decision to acquire Linear Technology Corporation. Linear Technology added some 20% earnings growth accretion to Analog Devices' results and has turned ADI into one of the best business models in the chip sector. Likewise, second quarter revenue of $1.1 billion, though it was inline with Street forecast, surged 41% year over year from $778 million.
"Business conditions during the quarter were strong, and our results were above the high end of our revised guidance range led by broad-based strength, particularly in the industrial end market," CEO Vincent Roche said in a statement. And the company sees no signs of slowing down. While referring to the Linear Technology acquisition, Roche said the combined company creates a "high-performance analog industry powerhouse."
Roche's confidence was demonstrated in his guidance. For the current quarter, Analog Devices expects to deliver adjusted earnings of $1.14 per share, up 40%, while revenue of $1.38 billion would rise 55% year over year, based on the midpoint of its guidance. Both measures would top Wall Street forecast for $1.04 and $1.35 billion. And given the momentum ADI is riding, investors who are on the sidelines shouldn't hold their breath for a better entry point.
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