EUR 850.00 For Business Accounts Only

Morningstar | Analog Devices' Ceased Shipments to Huawei Won't Be Catastrophic in the Near Term; Maintain $98 FVE

Analog Devices reported solid fiscal second-quarter results toward the high end of prior guidance, while unsurprisingly providing investors with a soft outlook for the third quarter as it has ceased shipping semiconductors into Huawei due to the U.S. government's restrictions on trade with the Chinese networking and smartphone maker. We will maintain our $98 fair value estimate for wide moat Analog Devices and view shares as fairly valued.

For the April quarter, revenue was $1.53 billion, down only 1% sequentially and toward the high end of the firm's prior forecast of $1.45 billion-$1.55 billion as discussed in February. On a year-over-year basis, after adjusting the prior-year period sales on a sell-in basis, revenue was down 2%. Communications chip sales was the bright spot, up 31% year over year (again after adjustments), thanks to strong demand for 5G products, where the firm is earning higher dollar content than 4G chipsets. However, we suspect that some of the upside may have come from sales into Huawei, as Huawei has reportedly stocked up on chips in advance of the U.S. ban. Industrial chip sales were down 6% year over year, with strength in aerospace and defense offset by weakness in factory automation. Automotive chip sales were flat year over year, but we're encouraged that the firm's battery management system business was up over 20% year over year within autos, offsetting weakness in global car unit sales. Overall, adjusted operating margin held up quite well at 41.5%, up 30 basis points sequentially.

For the July quarter, Analog Devices expects revenue in the range of $1.40 billion-$1.50 billion, which, at the midpoint, would be down 5% sequentially and about 7% year over year (again after adjustments). The company expects no sales into Huawei in the quarter (except what was shipped prior to the ban), while noting that it does not have a communications customer that makes up more than a mid-single-digit percentage of sales.

We remain encouraged by Analog Devices' diversification and pleased by its comments that the industrial business is seeing "stabilization" and expects the year-over-year decline in the fiscal third quarter to be less than the 6% decline seen in the second quarter. That said, we're skeptical of management's crystal ball on industrial at this point in time, as we struggle to see how the day-by-day negotiations of the U.S.-China trade conflict won't weigh on the end market demand and forecasting ability of its customers. We continue to fear that another short-term bout of uncertainty and order pauses is on the horizon. However, such a pause would not deter our long-term view of rising content in autos, industrial, and communications equipment in the years ahead and doesn't weigh on our fair value estimate for the firm.