Foolish Forecast: Analog Goes on a Diet

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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.