Analog Devices (ADI) reports after the close and I expect a pretty decent quarter. Analysts think the company can earn $0.60 a share on revenue of $760.5 million.
After a tough summer, the stock rebounded when the company reported a better fourth quarter last August. Just before Thanksgiving, Analog Devices beat the consensus first quarter estimate by $0.01, which kept the summer rally going.
Because ADI is one the best-managed semiconductor companies in the world, investors have always felt safe buying the stock despite a rocky semiconductor market. First quarter revenue was driven by strong a communications business. The company had good demand in the industrial, auto and global 4G LTE businesses, too.
The strength from the summer and Thanksgiving should continue, but ADI's valuation is giving me pause. At $57 the stock is trading at 18x fiscal year estimates of $3.16. That's for a company that is only expected to grow revenue 8%. ADI grew 13% in fiscal 2015 only because of the acquisition of Hittite Microwave (HITT).
The company struggles to grow its top line in the double-digit range because much of its growth is dependent on economic activity as a whole and not on hot semiconductor markets.
The largest part of the Analog Devices revenue comes from the industrial market. Over 47% of revenue is industrial, with communications making up the next largest segment at 24%. The rest, about 18%, is automotive. For ADI to boost its growth, it needs more of its revenues to come from faster-growing markets. That's always been ADI's toughest problem -- the company's success tied to GDP growth.too closely.
Because its end markets tend to be stable, however, the company is able to consistently produce mid-$60s gross margins, which makes ADI one of the most profitable semiconductor companies around.
I would be more interested in purchasing ADI around $50.