Analog Devices: Setting My Target To $110

| About: Analog Devices (ADI)


Add the name Analog Devices to the list of semiconductor companies that are breaking to new highs.

Analog Devices is crushing it in terms of execution.

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.

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.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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