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Stock Analyst Update

Raising Our Fair Value Estimate on Analog Devices

The wide-moat firm incorporated its acquisition of Linear Technology, and the combined firm foresees strong ongoing business conditions ahead.

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 Analog Devices (ADI) reported strong fiscal second-quarter results as the firm incorporated its acquisition of Linear Technology and the combined firm foresees strong ongoing business conditions ahead. We will raise our fair value estimate for wide-moat ADI to $82 per share from $70, based on greater visibility into the financials of the combined firm, more optimistic long-term revenue assumptions, and modestly lower long-term tax rate assumptions.

ADI's revenue in the April quarter, including seven weeks of revenue contribution from Linear Tech, was $1.15 billion. Excluding Linear, ADI's organic revenue was about $1 billion, up 2% sequentially and 28% year over year, both of which were ahead of the firm's prior expectations. The company continues to see healthy chip demand, particularly in industrial end markets like factory automation. Meanwhile, the firm doesn't think that business conditions are overheating just yet. ADI's organic industrial revenue was up 15% sequentially and 20% year over year. Meanwhile, ADI's automotive business was up 8% sequentially and 9% year over year, and we remain optimistic about the firm's opportunities selling chips into active safety systems. After adjusting for a host of acquisition-related charges, ADI's combined adjusted gross margin, including Linear, was 69.3%, up 320 basis points sequentially, thanks to contributions from Linear, which regularly generated 75% gross margins.

For the July quarter, ADI expects GAAP revenue in the range of $1.34 billion-$1.42 billion, which likely suggests modest organic growth excluding Linear. Industrial and consumer revenue are expected to grow sequentially, while automotive chip sales face a typical seasonal mid-single-digit sequential decline. However, ADI did hint that it expects its consumer business to decline as a percentage of its ADI organic business, which may imply some content loss (in units, price per unit, or perhaps both) in upcoming iPhones.

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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.