One of the Better Picks Among Chipmakers
We would probably be enthusiastic buyers of wide-moat Analog Devices in the event of a pullback.
Our key takeaway from Analog Devices' (ADI) analyst day is that both the firm's growth opportunities in industrial and automotive semiconductors and its revised financial targets (incorporating recently acquired Linear Technology) are consistent with our long-term thesis for the firm. We continue to view the automotive sector as the most promising opportunity for the combined company, thanks to increased content per car, but we can't rule out significant future growth prospects in industrial (especially in factory automation and robotics) and telecommunications (including radio frequency, microwave, and millimeter wave products needed for 5G network deployments). We will maintain our $82 fair value estimate and wide moat rating for the firm. Analog Devices' shares appear fully valued to us, but since we see many other chipmakers trading well above our fair value estimates, the firm represents one of the better picks in the sector. We would probably be enthusiastic buyers of this high-quality name in the event of a pullback.
Analog Devices provided investors with nice insight into its long-term revenue growth targets by sector, all of which we think are achievable. The firm foresees industrial revenue growing at 2 times global gross domestic product, automotive sales at 3 times the rate of global auto production, and up to mid-single-digit sales growth for its consumer business (excluding the effects of the company's declining chip business with Apple) and telecom segment. These rates also don't factor in potential revenue synergies for Analog Devices-Linear, yet the company thinks it might be able to achieve another $1 billion of sales from the merger (starting in 2019) by cross-selling products to new customers and applications. Meanwhile, the firm's targets of 70% gross margins and 39%-45% operating margins appear conservative to us in light of previously discussed expense synergies with Linear.
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Brian Colello does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.