Rating Update: Stock Rating C-High Neutral (8/15/19)-Analog Devices Inc. (ADI).

out_logo_500#02592.jpg

BUSINESS

Analog Devices, Inc. designs, manufactures, and markets a portfolio of solutions that leverage analog, mixed-signal, and digital signal processing technology, including integrated circuits (ICs), algorithms, software, and subsystems. It offers data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; high-performance amplifiers to condition analog signals; and radio frequency ICs to support cellular infrastructure. The company also provides microelectromechanical systems technology solutions, including accelerometers used to sense acceleration, gyroscopes to sense rotation, and inertial measurement units to sense multiple degrees of freedom. In addition, it offers isolators for various applications, such as universal serial bus isolation in patient monitors; and smart metering and satellite applications.
out_plist#02592.jpg

INVESTMENT RATING

out_map1#02592.jpg

ADI’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a Value Builder.

Analog Devices has a current Value Trend Rating of C (High Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. Analog Devices has a poor Appreciation Score of 28 but a good Power Rating of 82, resulting in the High Neutral Value Trend Rating.

Analog Devices’ stock is selling above targeted value. The current stock price of $108.45 compares to targeted value 12 months forward of $91.
This low appreciation potential results in an appreciation score of 28 (72% of the universe has greater appreciation potential.)
out_pt#02592.jpg

Analog Devices has a Power Rating of 82. (This good Power Rating indicates that ADI has a better chance of achieving attractive investment performance over the near to intermediate term than all but 18% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; and is currently in a modestly favorable positi. An offsetting factor is earnings estimate behavior for ADI has been slightly negative recently.

INVESTMENT PROFILE

ADI’s financial strength is exceptional. Financial strength rating is 92.
out_pfit1#02592.jpg

Relative to the S&P 500 Composite, Analog Devices Inc. has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that ADI is normal risk. High stock price volatility is a relative weakness for ADI. ADI’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and moderate price/book ratio. ADI has high market capitalization.

CURRENT SIGNALS

Analog Devices’ current operations are strong. Return on equity is rising, reflecting: improving asset utilization; widening pretax margins; rising tax keep rate; and rising leverage.

Analog Devices’ current technical position is very strong. The stock price is in a 1.9 month up move. The stock has appreciated 26.1% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Analog Devices Inc. (NASDAQ: ADI). Marginal positive changes in fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
The stock is currently rated C.
Analog Devices Inc. (NASDAQ: ADI) stock closed at $3.93 on 8/15/19 after a major decline of -13.4%. NORMAL trading volume accompanied the decline. The stock has declined -1.2% during the last week but has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2018, Analog Devices experienced a significant decline in cash of -$231 million (-22%). Sources of cash were lower than uses. Cash generated from 2018 EBITDA totalled +$2,768 million. Non-operating uses consumed -$77 million (-3% of EBITDA). Cash taxes consumed -$891 million (-32% of EBITDA). Withdrawal of investment from the business totalled +$409 million (+15% of EBITDA). On a net basis, debt investors removed -$1,772 million (-64% of EBITDA) while equity investors withdrew -$668 million (-24% of EBITDA).
out_cflow.1#02592.jpg

Analog Devices’ Non-operating Income, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Analog Devices Inc. Peer Group. In most years, Analog Devices was in the lower quartile and top quartile. Currently, Analog Devices is lower quartile at -3% of EBITDA (-$77 million).

Analog Devices’ Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Analog Devices Inc. Peer Group. In most years, Analog Devices was in the top quartile and third quartile. Currently, Analog Devices is at the lower quartile at -32% of EBITDA (-$891 million).

Analog Devices’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Analog Devices Inc. Peer Group. In most years, Analog Devices was in the second quartile and top quartile. Currently, Analog Devices is substantially above median at +15% of EBITDA (+$409 million).

Analog Devices’ Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Analog Devices Inc. Peer Group. In most years, Analog Devices was in the top quartile and second quartile. Currently, Analog Devices is lower quartile at -64% of EBITDA (-$1,772 million).

Analog Devices’ Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Analog Devices Inc. Peer Group. In most years, Analog Devices was in the second quartile and lower quartile. Currently, Analog Devices is upper quartile at -24% of EBITDA (-$668 million).

Analog Devices’ Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Analog Devices Inc. Peer Group. In most years, Analog Devices was in the top quartile and lower quartile. Currently, Analog Devices is slightly above median at -8% of EBITDA (-$231 million).
out_cflow.2#02592.jpg

Analog Devices’ Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Analog Devices Inc. Peer Group. (Since 2016 Cash, %Revenue has accelerated very sharply.) In most years, Analog Devices was in the top quartile. Currently, Analog Devices is at the lower quartile at +13%.

PROFITABILITY

Analog Devices’ return on equity has eroded significantly since 2009 although it experienced a very sharp recovery after the 2017 low.
Analog Devices’ very strong negative trend in pretax operating return significantly offset by a very strong positive trend in non-operating factors is a significant analytical factor.
The productivity of Analog Devices’ assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend but it experienced a very sharp recovery after the 2017 low.
Additionally, pretax margin has exhibited little to no overall change but it experienced very sharp improvement from the 2017 level.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
out_dpgrfs3#02592.jpg

Analog Devices’ return on equity is at median (13.4%) for the four quarters ended April, 2019.
out_dpgrfs3.2#02592.jpg
Operating performance (pretax return on assets) is at the upper quartile (7.8%) reflecting asset turnover that is at median (0.29X) and upper quartile pretax margin (27.4%).
Tax “keep” rate (income tax management) is upper quartile (92.0%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.85X).

GROWTH RATES

There are no significant differences between Analog Devices’ longer term growth and growth in recent years.
Analog Devices’ historical income statement growth and balance sheet growth have diverged. Revenue growth has fallen short of asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 8.0% per year. (More recently it has been 13.9%.)

Total asset growth has been 17.5% per year.

Annual E.P.S. growth has been 10.2% per year.

Equity growth has been 12.9% per year. (More recently it has been 22.0%.)

Analog Devices’ consensus growth rate forecast (average of Wall Street analysts) is 12.6% — in line with the average of the historical growth measures.
out_growthgrf#02592.jpg

Relative to the Analog Devices Inc. Peer Group, Analog Devices’ historical growth measures are erratic. Total asset growth (17.5%) has been upper quartile. Equity growth (12.9%) has been at the upper quartile. E.P.S. growth (10.2%) has been slightly above median. Revenue growth (8.0%) has been substantially above median.

Consensus growth forecast (12.6%) is at the upper quartile.
out_growthgrf.2#02592.jpg

PRICE HISTORY

Over the full time period, Analog Devices’ stock price performance has been variable and superior. Between October, 2008 and August, 2019, Analog Devices’ stock price rose +408%; relative to the market, this was a +73% gain. Significant price moves during the period: 1) February, 2016 – April, 2019: +119%; 2) September, 2011 – May, 2015: +117%; and 3) November, 2008 – May, 2011: +141%.
out_price#02592.jpg

TOTAL INVESTMENT RETURNS

Current annual total return performance of 24.7% is upper quartile relative to the S&P 500 Composite.
In addition to being upper quartile relative to S&P 500 Composite, current annual total return performance through July, 2019 of 24.7% is substantially above median relative to Analog Devices Inc. Peer Group.

Current 5-year total return performance of 21.7% is upper quartile relative to the S&P 500 Composite.
Through July, 2019, with upper quartile current 5-year total return of 21.7% relative to S&P 500 Composite, Analog Devices’ total return performance is upper quartile relative to Analog Devices Inc. Peer Group.
out_quartret#02592.jpg

VALUATION BENCHMARKS

Relative to S&P 500 Composite, ADI’s overall valuation is high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/assets is above median. Ratio of enterprise value/earnings before interest and taxes is near the upper quartile. Price/earnings ratio is above median. The lowest factor, the price/equity ratio, is slightly above median.

Relative to Analog Devices Inc. Peer Group, ADI’s overall valuation is quite high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/assets is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Price/equity ratio is at the upper quartile. The lowest factor, the price/earnings ratio, is at median.
out_tradv#02592.jpg

Analog Devices has a major value gap compared to the median valuation. For ADI to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 7.27X to 3.89X. If ADI’s ratio of enterprise value/revenue were to fall to 3.89X, its stock price would be lower by $-57 to $51.
For ADI to fall to lower quartile valuation relative to the Analog Devices Inc. Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 7.27X to 1.80X. If ADI’s ratio of enterprise value/revenue were to fall to 1.80X, its stock price would decline by $-92 from the current level of $108.

VALUE TARGETS

ADI’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be a Value Builder.
Analog Devices’ current Price Target of $92 represents a -15% change from the current price of $108.45.
This low appreciation potential results in an appreciation score of 28 (72% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 28, the high Power Rating of 82 results in an Value Trend Rating of C.
out_vc#02592.jpg

Analog Devices’ current Price Target is $92 (-4% from the 2018 Target of $96 and -15% from the 08/15/19 price of $108.45). This plateau in the Target is the result of a +24% increase in the equity base and a -23% decrease in the price/equity multiple. The forecasted decline in cost of equity has a large positive impact on the price/equity multiple and the forecasted increase in growth has a slight positive impact as well. More than offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
out_wc.1#02592.jpg
out_wc.2#02592.jpg

PTR’s return on equity forecast is 14.1% — slightly below our recent forecasts. Forecasted return on equity exhibited a modest, erratic decline between 2010 and 2018. The current forecast is well below the 2010 peak of 22%.

PTR’s growth forecast is 14.0% — in line with our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2010 low of 4%.

PTR’s cost of equity forecast is 10.2% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is steady at the 2010 low of 8.9%.
out_vc.2#02592.jpg
At Analog Devices’ current price of $108.45, investors are placing a positive value of $55 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 17.5% versus a cost of equity of 10.9%.
PTR’s 2020 Price Target of $92 is based on these forecasts and reflects an estimated value of existing assets of $55 and a value of future investments of $37.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

Be the first to comment

Leave a Reply

Your email address will not be published.


*


This site uses Akismet to reduce spam. Learn how your comment data is processed.