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Bull of the Day: Analog Devices (ADI)

Neena Mishra

Headquartered in Norwood, Massachusetts, Analog Devices (ADI) is an original equipment manufacturer of semiconductor devices, specifically, analog, mixed signal and digital signal processing (DSP) integrated circuits.

Analog chips are used primarily in smartphones for managing radio signals and other purposes. These chips convert real world signals into digital signals. Apple is Analog's one of the biggest customers.

Solid Quarterly Results and Upgraded Guidance

The chip maker reported excellent results for Q4, beating both the Zacks Consensus Estimates and their own guidance. Adjusted earnings of 94 cents per share were significantly ahead of the Zacks Consensus Estimate of 73 cents.

Revenues were up 27.9% year over year and beat the estimates. Free cash flow margins to were up 520 basis points year-over-year to 33.7%.

Improved performance across all the markets--industrial, automotive, consumer and communications—drove the results.

Shares rose almost 5% after the results.

Returning Cash to Shareholders

The company has retuned approximately $7 billion to shareholders in the past 10 years. After strong results, they raised quarterly dividend to 45 cents from 42 cents.

They aim to increase their dividend by 5% to 10% annually.

Acquisition of Linear Technologies

Last week, the company completed the acquisition of another analog chipmaker Linear Technology for about $14.8 billion. The merger is expected to reduce Analog’s reliance on Apple while adding products in other fast growing categories.

“The combination of Analog Devices and Linear Technology creates an analog industry powerhouse,” said the CEO. “Together, we are capable of solving more of our customers' biggest and most complex challenges at the intersection of the physical and digital domains. We expect that this combination will create tremendous value for our customers, our employees, and our shareholders for many years to come.”

Surging Estimates

Analysts have significantly raised their estimates for the company after strong earnings and upgraded guidance. Zacks Consensus Estimates for the current and next year are now $4.02 per share and $4.65 per share, up from $3.39 and $3.69, 30 days ago.

The company has a pretty good record at beating estimates. They have missed only once in the past five years; the average quarterly beat for the last four quarters was more than 14%.


Analog Devices, Inc. Price and Consensus

Analog Devices, Inc. Price and Consensus | Analog Devices, Inc. Quote


Positive Industry Outlook

“Semiconductor-Analog” industry is currently ranked 18 out of 265 Zacks industries (top 7%). While some of the traditional businesses for chips have slowed down, many newer growth areas have emerged, leading to rising demand for better and faster chips.

Disclosure: I own shares of ADI in the Income Investor portfolio.

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