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Morningstar | ADI Reports Solid 1Q Results Along With a Strong Dividend Boost; Raising FVE to $98 from $96

Analog Devices reported solid fiscal first-quarter results and provided investors with a second-quarter forecast that was squarely in line with our expectations, as the company adequately navigated a difficult demand environment and continued to see decent demand for communication infrastructure products associated with 5G network buildouts. We were also pleased to see ADI boost its quarterly dividend by 12.5% to $0.54 per share while raising its target for annual increases to 15% from 7%, as we continue to applaud the firm's plans to distribute excess cash to shareholders. We have increased our fair value estimate for wide-moat ADI to $98 from $96 as we've modestly raised our long-term revenue growth rates. We now view shares as slightly overvalued, as the attractive margin of safety at the start of 2019 has evaporated after a 20%-plus rally year to date.

ADI's revenue in the January quarter was $1.54 billion. After restating prior-period results to account for revenue on a sell-in, rather than sell-through, basis, revenue was flat sequentially and up 6% year over year after also adjusting for a 14-week quarter in the prior period (down 2% year over year unadjusted). Communications infrastructure sales were again the bright spot, up 44% year over year (adjusted), up 8% sequentially and ahead of management's prior expectations as the company is faring well in 5G massive MIMO antenna deployments. Industrial revenue held up fairly well, flattish on an adjusted basis and down only 1% sequentially, with strength in several applications like healthcare and aerospace/defense offset by weakness in factory automation and memory testing equipment.

For the April quarter, ADI expects revenue of $1.45 billion-$1.55 billion, which would represent a 3% sequential decline and a 4% year-over-year decline compared with restated revenue in the same period a year ago. The forecast is consistent with those of peers in recent weeks.

Looking ahead, ADI expects industrial and automotive revenue to be down year over year, as we would have expected in light of a still-sluggish demand environment versus strong growth in the first half of fiscal 2018 last year. Communication infrastructure chip sales should again see tremendous growth year over year thanks to ongoing 4G and 5G wireless infrastructure demand. Consumer chip sales will likely be down on a year over year basis, as chip design losses at Apple should cause ADI's smallest segment to decline by 10%-20% year over year in all of fiscal 2019.