Linear Technology (Nasdaq: LLTC ) is a hard stock for most investors to follow. The company designs obscure chips like power controllers and signal conditioners, far from the more accessible central processors of Intel (Nasdaq: INTC ) or data storage chips from Micron (NYSE: MU ) . Linear rarely brags about design wins, and with 15,000 customers large and small, it's tough to keep track of where the company's chips are flowing.
But one thing is certain: Linear's high-end analog chips are in pretty high demand. Fourth-quarter sales ticked in at $208 million, 4% above the third quarter. Earnings stayed flat at $0.25 per share, despite a sizable tax benefit in the previous quarter. Linear is controlling costs with an iron fist to make up for the recession-fueled low order volume: All employees have agreed to a temporary 10% pay cut, on top of forced vacation time.
Management is clearly putting shareholders' best ahead of what the workforce would prefer, to a degree that seems downright greedy when you consider Linear's position in the analog semiconductor market. Gross margins climbed to a stunning 74.3% this quarter, a 0.5% sequential jump, while the net margin stayed rock-steady at 27%. Compare those plump profit takes with those of Linear's closest competitors:
Data from Capital IQ.
As heartless as it might seem to make drastic cuts and whatnot to protect already sector-leading margins, shareholders should appreciate Linear's focus on profits. This is a business, after all -- not a charity. And Linear looks poised to bounce back from the recession in a big way, thanks to a lean and mean costs structure and attractive business prospects.
Linear designs chips for the high-margin end of the market, leaving others to fight over less profitable contracts. Apple (Nasdaq: AAPL ) has been known to use Linear's power regulators in iPhones and iPods, for example. Its power monitor chips are making their way into hybrid and all-electric cars in Japan. In fact, Linear hopes to become a power player in the automotive market as electric power shoulders some of the load that fossil fuels have been handling for arguably too long.
And you can buy into all of this promise and greed for around 20 times trailing free cash flow -- a metric that tends to float in the upper 20s to lower 30s. No wonder Tom Gardner handpicked Linear Technology for Motley Fool Stock Advisor subscribers last year: The profit potential looks massive, especially if management stays hungry and greedy.
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