Analog Devices (NYSE: ADI) is sitting pretty. At a time when other chip makers and technology titans complain about constrained supply chains and/or slowing sales, Analog is doing neither. Instead, the company is reporting phenomenal revenue momentum atop the fattest margins in company history. Oh, and the tepid Chinese chip orders that held the company back last quarter indeed turned out to be a temporary problem -- the affected communications division roared back with the strongest sequential sales growth among Analog's segments.
Maybe the calls for a double-dip recession in the IT industry were a bit premature.
At $720 million, Analog's sales made an 8% sequential improvement and a 46% year-over-year gain. You will recall that Maxim Integrated Products (Nasdaq: MXIM) recently reported 43% annual sales growth, Texas Instruments (NYSE: TXN) stopped at 42%, and Cypress Semiconductor (NYSE: CY) settled for 43% as well. Analog Devices is running ahead of the whole pack.
Last quarter's 65% gross margin was already a record for ADI, but there was still room for improvement: the third quarter's gross margin inflated to 66.7%. The trickle-down economics of the income statement then created record operating and net profit margins as well, and earnings nearly tripled from $0.22 a share a year ago to $0.65 per share today.
I think there's still more headroom in the operating model. For example, direct competitor Linear Technology (Nasdaq: LLTC) sports 77% trailing gross margins, and there's no reason why Analog couldn't get there as well. The fixed costs of running your own manufacturing plants means that higher utilization of those production lines will yield fatter margins -- and Analog stands at about 80% utilization today.
In the words of CFO Dave Zinsner: "We are running the business at a significantly higher profitability level versus prior peaks." If the company can keep up or improve upon the margin performance, this could be a great time to own Analog stock. A 3% dividend backed by strong cash flows doesn't hurt any, either. I'm rating this stock "outperform" in our CAPS system right now. Follow in my all-star footsteps and make your own mark, whether you agree or not.
