BUSINESS
Analog Devices, Inc. designs, manufactures, tests, and markets integrated circuits (ICs), software, and subsystems that leverage analog, mixed-signal, and digital signal processing technologies. The company provides data converter products, which translate real-world analog signals into digital data, as well as translates digital data into analog signals; power management and reference products for power conversion, driver monitoring, sequencing, and energy management applications in the automotive, communications, industrial, and high-end consumer markets; and power ICs that include performance, integration, and software design simulation tools for accurate power supply designs.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, ADI is expected to continue to be an important 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 inconsistent signals. Analog Devices has a good Appreciation Score of 72 but a neutral Power Rating of 47, with the High Neutral Value Trend Rating the result.
Analog Devices’ stock is selling well below targeted value. The current stock price of $193.72 compares to targeted value 12 months forward of $372.
Analog Devices’ high appreciation potential results in an appreciation score of 72 (only 28% of the universe has greater appreciation potential.)
Analog Devices has a Power Rating of 47. (This neutral Power Rating indicates that ADI’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: ADI’s earnings estimates have fallen very significantly in recent months; and the Semiconductor, Related Devices comparison group is in a slightly weakened position currently. An offsetting factor is recent price action has been slightly favorable.
INVESTMENT PROFILE
ADI’s financial strength is exceptional. Financial strength rating is 93.
Relative to the S&P 500 Composite, Analog Devices Inc has moderate Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that ADI is lower risk. Low financial leverage is a positive for ADI. Relative weaknesses include: low forecasted profitability, and low historical profitability. ADI’s valuation is moderate: median dividend yield, high 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; and rising leverage.
Analog Devices’ current technical position is very strong. The stock price is in a 1.6 month up move. The stock has appreciated 25.1% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
In light of this new information we are reviewing our current Overall Rating of C. This review will be completed in the next several days.
Analog Devices Inc (NASDAQ: ADI) has reported earnings for its first fiscal quarter (ending January 31) of $0.93 versus $1.90 for the same period a year ago. For the latest four quarters through January 31, E.P.S. were $5.62 versus $6.68 for the same period a year ago.
Analog Devices Inc (NASDAQ: ADI) stock enjoyed a large increase of 2.3% on 2/21/24. The stock closed at $193.72. Moreover, trading volume in this advance was unusually high at 167% of normal. The stock has been strong relative to the market over the last nine months but is unchanged during the last week.
CASH FLOW
In 2023, Analog Devices experienced a very significant reduction in cash of -$513 million (-35%). Sources of cash were much lower than uses. Cash generated from 2023 EBITDA totaled +$6,284 million. Non-operating uses consumed -$118 million (-2% of EBITDA). Cash taxes consumed -$788 million (-13% of EBITDA). Re-investment in the business amounted to -$1,845 million (-29% of EBITDA). On a net basis, debt investors provided +$170 million (+3% of EBITDA) while equity investors received -$4,215 million (-67% of EBITDA).
Analog Devices’ Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Analog Devices Peer Group. (Since 2021 Non-operating Income, %EBITDA has accelerated.) In most years, Analog Devices was in the third quartile and lower quartile. Currently, Analog Devices is substantially below median at -2% of EBITDA (-$118 million).
Analog Devices’ Cash Taxes, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by an uptrend for the Analog Devices Peer Group. (Since 2021 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Analog Devices was in the top quartile and second quartile. Currently, Analog Devices is slightly above median at -13% of EBITDA (-$788 million).
Analog Devices’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Analog Devices Peer Group. In most years, Analog Devices was in the second quartile and lower quartile. Currently, Analog Devices is slightly above median at -29% of EBITDA (-$1,845 million).
Analog Devices’ Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Analog Devices Peer Group. In most years, Analog Devices was in the lower quartile and top quartile. Currently, Analog Devices is below median at +3% of EBITDA (+$170 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 Peer Group. In most years, Analog Devices was in the third quartile and second quartile. Currently, Analog Devices is substantially below median at -67% of EBITDA (-$4,215 million).
Analog Devices’ Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Analog Devices Peer Group. In most years, Analog Devices was in the second quartile and lower quartile. Currently, Analog Devices is slightly above median at -8% of EBITDA (-$513 million).
Analog Devices’ Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Analog Devices Peer Group. In most years, Analog Devices was in the third quartile and top quartile. Currently, Analog Devices is at the lower quartile at +8%.
PROFITABILITY
Analog Devices’ return on equity has eroded very significantly since 2014. The current level of 9.3% is 1.30X the low for the period and is -29.5% from the high.
This very significant erosion was due to very strong negative trend in pretax operating return and very small negative trend in non-operating factors.
The productivity of Analog Devices’ assets declined over the full period 2014-2023: asset turnover has suffered a very strong overall downtrend but it experienced a very sharp recovery after the 2021 low.
Partially offsetting this trend, however, pretax margin has exhibited a volatile overall uptrend that accelerated very sharply from the 2021 level.
Non-operating factors (income taxes and financial leverage) had a very small negative influence on return on equity.
Analog Devices’ return on equity is below median (9.3%) for the four quarters ended October, 2023.
Operating performance (pretax return on assets) is upper quartile (7.4%) reflecting asset turnover that is slightly above median (0.25X) and upper quartile pretax margin (29.3%).
Tax “keep” rate (income tax management) is at the upper quartile (91.9%) resulting in after tax return on assets that is upper quartile.
Financial leverage (leverage) is lower quartile (1.37X).
GROWTH RATES
Overall, Analog Devices’ growth rate has slowed very considerably in recent years.
Analog Devices’ historical income statement growth has been lower than balance sheet growth. Revenue growth has fallen short of asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 9.7% per year. (More recently it has been 17.6%.)
Total asset growth has been 18.1% per year. (More recently it has been -2.0%.)
Annual E.P.S. growth has been 12.9% per year. (More recently it has been 23.9%.)
Equity growth has been 19.7% per year. (More recently it has been -1.8%.)
Analog Devices’ consensus growth rate forecast (average of Wall Street analysts) is 10.2% — below the average of the historical growth measures.
Relative to the Analog Devices Peer Group, Analog Devices’ historical growth measures are consistently top quartile. Equity growth (19.7%) has been upper quartile. Total asset growth (18.1%) has been upper quartile. Revenue growth (9.7%) has been at the upper quartile. E.P.S. growth (12.9%) has been at the upper quartile.
Consistent with this pattern, consensus growth forecast (10.2%) is also at the upper quartile.
PRICE HISTORY
Over the full time period, Analog Devices’ stock price performance has been variable and quite good. Between April, 2013 and February, 2024, Analog Devices’ stock price rose +340%; relative to the market, this was a +41% gain. Significant price moves during the period: 1) March, 2020 – November, 2021: +101%; and 2) February, 2016 – April, 2019: +119%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 14.3% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through January, 2024 of 14.3% is above median relative to Analog Devices Inc Peer Group.
Current 5-year total return performance of 16.7% is upper quartile relative to the S&P 500 Composite.
Through January, 2024, with upper quartile current 5-year total return of 16.7% relative to S&P 500 Composite, Analog Devices’ total return performance is upper quartile relative to Analog Devices Inc Peer Group.
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 below median.
Relative to Analog Devices 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 upper quartile. Price/earnings ratio is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is at the upper quartile. The lowest factor, the price/equity ratio, is at median.
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 8.40X to 4.34X. If ADI’s ratio of enterprise value/revenue were to fall to 4.34X, its stock price would be lower by $-101 to $93.
For ADI to fall to lower quartile valuation relative to the Analog Devices Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 8.40X to 1.87X. If ADI’s ratio of enterprise value/revenue were to fall to 1.87X, its stock price would decline by $-162 from the current level of $194.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, ADI is expected to continue to be an important Value Builder.
Analog Devices’ current Price Target of $392 represents a +103% change from the current price of $193.72.
This high appreciation potential results in an appreciation score of 72 (only 28% of the universe has greater appreciation potential.)
With this high Appreciation Score of 72, the neutral Power Rating of 47 results in an Value Trend Rating of C.
Analog Devices’ current Price Target is $392 (+11% from the 2023 Target of $353 and +103% from the 02/21/24 price of $193.72). This slight rise in the Target is the result of a +19% increase in the equity base and a -7% decrease in the price/equity multiple. The forecasted decline in growth has a very large negative impact on the price/equity multiple and the forecasted decline in return on equity has a very large negative impact as well. Partially offsetting these Drivers, the forecasted decline in cost of equity has a very large positive impact.
PTR’s return on equity forecast is 10.2% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2015 and 2023. The current forecast is well below the 2018 peak of 19%.
PTR’s growth forecast is 13.0% — significantly below our recent forecasts. Forecasted growth enjoyed a dramatic, variable increase between 2015 and 2023. The current forecast is well above the 2016 low of 5%.
PTR’s cost of equity forecast is 5.1% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2015 and 2023. The current forecast is well below the 2018 peak of 11.2%.
At Analog Devices’ current price of $193.72, investors are placing a positive value of $72 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 24.0% per year, and a return on equity of 11.7% versus a cost of equity of 7.0%.
PTR’s 2025 Price Target of $392 is based on these forecasts and reflects an estimated value of existing assets of $176 and a value of future investments of $216.
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