Why Selling This Stock Is Not a Good Idea

A recovery in the semiconductor industry can take Analog Devices higher this year.

Jan 27, 2014 at 3:30PM

The New Year hasn't been a happy one for diversified semiconductor company Analog Devices (NASDAQ:ADI). The stock was hit with a downgrade by Wells Fargo analyst David Wong on just the second day of the New Year. Wong cut his rating from "outperform" to "market perform," citing Analog Devices' fair valuation and balanced risk-reward profile, despite being optimistic about the semiconductor industry's outlook this year.

Also, Analog Devices' outlook for the ongoing quarter wasn't up to expectations when it had released its results in late November last year. The company expects seasonality to hurt business in the current period, similar to what industry peer Texas Instruments (NASDAQ:TXN) had said the last time it reported earnings.

However, considering the robust prospects in end-markets such as automotive, industrial, and communications, it won't be right to sell off Analog Devices straightaway. The stock had appreciated close to 25% in 2013, which might not look very impressive at first, given the market's terrific performance last year. However, Analog's enticing 2.70% dividend yield and well-diversified business are key points that investors shouldn't ignore.

Positive signs ahead
Analog Devices is optimistic about its end markets. In industrial, management believes that Analog's high-performance signal processing technology and system domain knowledge should help it gain more customers.  The company is counting on growth in various areas such as factory automation, connected and intelligent systems, and health care. This view is supported by semiconductor industry executives, who believe that sectors such as medical devices and industrial machinery are positioned for growth going forward, according to KPMG's annual global semiconductor industry outlook. 

Turning toward the automotive segment, Analog has seen solid growth here. Revenue from the segment was up 19% year-over-year in the last quarter, which is not surprising, considering strong vehicle sales in the U.S. last year. The company saw strong demand for chips used in various areas such as infotainment, safety, and powertrain. Analog Devices expects further tailwinds going forward, as new-generation infotainment systems gain ground and the safety aspect improves.  

Moreover, a look at the forecast for auto sales in 2014 also indicates that Analog's automotive segment is very likely to improve. According to Edmunds.com, vehicle sales are expected to rise to 16.4 million units in the U.S. this year, up from 15.6 million units last year.  

The global forecast is also quite encouraging, with IHS forecasting 85 million units this year, up from around 82 million last year. By 2018, global sales are expected to exceed 100 million. Thus, the long-term forecast for the auto industry looks appealing, and this could be an important driver for Analog Devices.

Communications to get better
Analog Devices should also see good growth in its communications infrastructure business. The 4G build-out by China Mobile (NYSE:CHL), a recovering European communications market, and capacity improvements by carriers in the U.S. are expected to assist growth going forward, according to management.  

For instance, China Mobile has been building the first 4G network in the country. The telecom giant is expected to spend $13.5 billion on the 4G roll out this year, and reports suggest that it intends to cover more than 350 cities with its 4G network by the end of the year. China Mobile is planning to build more than 500,000 base stations, as it aggressively rolls out the network, leading to stronger demand for Analog Devices' chips. 

In line with industry trends
Hence, all is not lost for Analog Devices and it certainly doesn't make sense to sell the stock in a year when the semiconductor industry is expected to perform well. While it's true that Analog's outlook was not up to the mark last time, and its book-to-bill ratio was also below 1, this is a pattern seen across the industry.  

For example, bellwether Texas Instruments also had a book-to-bill ratio of less than 1 in the previous quarter and issued a weak outlook. Texas Instruments blamed seasonality for its tepid guidance, much like Analog Devices. However, even Texas Instruments should benefit from the various tailwinds that Analog Devices has going forward, and the stock's forward P/E of 20 against the trailing P/E of 25.5 suggests that earnings growth can be expected in the future.

The bottom line
Analog Devices is not in a crisis. The company issued one weak outlook, but that was because of overall weakness in the semiconductor industry last quarter. However, there are signs that the semiconductor industry should improve going forward, driven by applications in different areas such as industrial, automotive, and communications. As such, investors should continue holding Analog Devices due to its diversified business and dividend yield.

Learn to pick ultimate growth stocks 
They said it couldn't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.


Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information