Please ensure Javascript is enabled for purposes of website accessibility

A Recovering Communications Business Is Making This Company Better

By Harsh Chauhan - Sep 4, 2013 at 8:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Analog Devices is gradually getting better.

Chipmaker Analog Devices (ADI 2.85%) has had a sluggish year so far, disappointing investors consistently on its outlook and delivering mixed results.

The company, which makes chips for industrial, automotive, communications, and consumer end markets, recently declared its third-quarter results, and its outlook was once again behind expectations. Analog Devices expects $675 million to $700 million in revenue for the ongoing quarter, which is below the Street estimate of $697 million at the mid-point.

This explains why Analog Devices is up just 12% this year while the PHLX Semiconductor index is up 22%. However, despite the poor guidance, Analog Devices is seeing improvements in its various end markets, and its order rates are on the rise. Management stated in the previous conference call that the book-to-bill ratio for the third-quarter was one, and total orders were better than the preceding quarter.

Rebound in progress
Most importantly, Analog's communications infrastructure business, which had been sluggish so far this year, increased 12% from the previous quarter. The buildout of the 3G TD-SCDMA network in China and rollout of 4G LTE networks in the U.S. finally pulled Analog's communications business out of a slump .

Going forward, the company expects this segment to do even better on the back of "densification" of 4G LTE networks in the U.S. and deployment in China. Densification involves replacing larger cell sites with a number of smaller cell sites, allowing telecom carriers to support more users and provide better services, especially in crowded areas.

For instance, through its Project Velocity IP program, telecom major AT&T (T 1.84%) has been aggressively deploying large and small cell sites as a part of its three-year plan to enhance its networks in different markets.

Ma Bell's LTE coverage has been increasing at a brisk pace and the carrier is focused on covering 300 million customers with its LTE service by the end of next year . Also, as other players such as Sprint, which will be spending $16 billion in the next two years to upgrade its infrastructure, deploy their own LTE networks, Analog Devices should continue witnessing growth in its communications business.

Another major driver should come out of China, where China Mobile (CHL) is set to deploy the nation's first 4G network . The world's largest telecom company by subscribers recently awarded contracts worth nearly $3.2 billion as it sets out to build 207,000 base stations in 31 provinces. According to China Daily, out of China Mobile's expected $30.5 billion capital spending this year, around 50% will be allocated to 4G LTE .

Analog Devices is optimistic about the future of its communications business and activity in the end market suggests that there are enough opportunities for growth.

All-around growth
With the communications infrastructure segment looking set for a rebound, Analog Devices will be in a better position to grow since its industrial and automotive businesses have already been doing well. The industrial semiconductor market has been doing well and according to IHS, sales of industrial electronics chips increased slightly in the first quarter to $7.71 billion.

The research firm stated that chipmakers are seeing leaner inventories on the back of strong orders from customers, and Analog Devices' management also echoed the same sentiment over the previous conference call.

In the automotive market as well, the company expects the proliferation of advanced safety features and use of higher electronic content for various applications such as in-car infotainment to increase its addressable market.

Final words
The weak performance of Analog Devices' communications business has weighed on the company so far this year, but with things looking up in the segment, the company would probably do better going forward.

With a trailing P/E of 22, Analog Devices trades slightly below the industry average of 23 , so investors won't be paying a very high price for the stock. Moreover, a decent dividend yield of 2.90% and a diversified business are some more reasons why Analog Devices looks like a good investment.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

China Mobile Limited Stock Quote
China Mobile Limited
CHL
AT&T Inc. Stock Quote
AT&T Inc.
T
$20.99 (1.84%) $0.38
Analog Devices, Inc. Stock Quote
Analog Devices, Inc.
ADI
$149.69 (2.85%) $4.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.