Foolish Forecast: Analog Goes on a Diet

On Tuesday night, it's time for a fourth-quarter report from broad-line semiconductor designer Analog Devices (NYSE: ADI  ) . Let's get all digital with Analog's big picture to see where the company is going from here.

What Fools say:
Here's how ADI's CAPS scoring rates against some of its peers and competitors:

Market Cap (millions)

Trailing P/E Ratio

CAPS Rating

Texas Instruments (NYSE:TXN)

$43,260

17.7

****

STMicroelectronics NV (NYSE:STM)

$13,620

NM

**

Analog Devices

$9,620

19.7

***

Linear Technology (NASDAQ:LLTC)

$6,700

21.2

****

National Semiconductor (NYSE:NSM)

$5,810

20.6

****

Data taken from Motley Fool CAPS on 11/26/2007.

Judging by these scores, Analog appears to be playing catch-up in an attractive sector. One optimistic Fool praises the strong balance sheet and management's commitment to buying back stock, while a bearish player laments a crumbling stock chart, despite the ADI presence in Nintendo's (OTC BB: NTDOY.PK) hot, hot, hot Wii console. "I don't believe they get enough of their business from Nintendo to make an impact," ends that diatribe.

What management does:
The margin slide that began a few months ago continues, with one notable exception. ADI is generating strong cash flows, even as profit margins dwindle away.

Margins

4/2006

7/2006

10/2006

2/2007

5/2007

8/2007

Gross

58.4%

58.6%

59.2%

59.3%

58.7%

58.3%

Operating

23.2%

23.3%

23.1%

22.8%

21.9%

21.1%

Net

18.5%

18.8%

21.4%

22.3%

21.3%

20.3%

FCF/Revenue

27.2%

21.4%

19.1%

19.4%

20.1%

24.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Analog is trying to slim down a bit. Three months ago, the company sold off some -- but not all -- of its wireless signal chips to Taiwanese semiconductor maker MediaTek. A couple of weeks ago, voltage regulators and thermal monitoring designs were handed off to rival On Semiconductor (Nasdaq: ONNN  ) . The two deals combined will bring in $535 million in cash. While extra cash rarely hurts, ADI's balance sheet is already in decent shape: no debt, $1.3 billion in cash equivalents, and an outsourced, fabless manufacturing strategy.

It's way too early to call this the beginning of a turnaround, particularly in light of the margin trends above. Simplifying the product portfolio could be a good move, though. The company website touts its 60,000 customers and 10,000 different products, which sounds impressive, but must be a nightmare to manage and support. Spinning out a couple of minor product lines is a start, but perhaps it's time to dig deep and refocus ADI on what it does best. That would be analog/digital converter chips and amplifier processors. With a sharper focus, Analog could be a semiconductor powerhouse, rather than a distracted also-ran.


Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 540777, ~/Articles/ArticleHandler.aspx, 10/22/2014 8:44:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement