EUR 850.00 For Business Accounts Only

Morningstar | Analog Devices Dialed In To Telecom Infrastructure Growth; Maintaining FVE, Shares Fairly Valued

Analog Devices reported solid fiscal third-quarter results and gave investors a decent forecast for the fiscal fourth quarter that pointed toward healthy ongoing business conditions in the industrial and communications infrastructure chip businesses, in particular. We’re encouraged by the firm’s commentary about longer-term growth rate expectations within its industrial and communications businesses, although the accelerated telecom growth (due to 5G equipment demand) may be slightly gross margin dilutive over time, and we note that the firm’s adjusted gross margin results and forecast in the near term were slightly below our prior expectations. All in all, we will maintain our $96 fair value estimate for wide moat the firm. Shares appear fairly valued today, but we would direct investors toward wide-moat peer Microchip Technology, especially as Analog's forecast provides a decent read through to Microchip that broad-based chip demand within the industrial sector is still holding up quite well despite recent worldwide tariff concerns.

Revenue in the July quarter was $1.57 billion, up 8% year-over-year (on an adjusted basis for acquisition-related revenue earned a year ago), up 4% sequentially, and above the high end of the firm’s forecast range of $1.47 billion-$1.55 billion as discussed in May. Communications infrastructure chip sales were the bright spot, as this inherently lumpy business was up 27% year over year and 12% sequentially, thanks to both 4G and 5G wireless and wired equipment demand. Industrial chip sales rose 14% year over year and 1% sequentially with broad based demand across most applications and all geographies. Automotive revenue rose 6% year over year, as Analog’s auto-related chip sales (while growing) continue to lag peers due to some legacy chip headwinds. Despite higher sales levels, adjusted gross margins dipped 10 basis points sequentially although they remain a stellar 71.2% and exceed the firm’s 70% long-term target.

For the October quarter, Analog expects revenue in the range of $1.53 billion-$1.61 billion, which, at the midpoint, would represent flattish sales sequentially and only 2% year-over-year growth. Headwinds will still come from its consumer business, as the firm will continue to lose content with Apple as the handset leader shifts its device mix toward phones with OLED screens that do not rely on Analog’s touch controllers. However, the headwind next quarter will likely be muted compared with our prior expectations, leading to Analog’s fourth-quarter revenue forecast exceeding our prior expectations (and likely consensus estimates). The firm is calling for low-double-digit revenue growth in the aggregate for its B2B (business-to-business) segments of industrial, automotive, and communications, with each of these segments also rising sequentially by modest amounts. However, adjusted gross margins are forecast to dip slightly again to 71.0% at the midpoint, again due to a product mix shift.

Longer-term, Analog was bullish on comm infrastructure demand for 5G, anticipating low-double-digit revenue growth, well ahead of the firm’s prior midcycle forecast of mid-single-digit growth. Yet the firm also hinted at another year of relatively sluggish automotive growth in the mid-single-digit range, at least compared with the prospects of the firm’s rivals like Texas Instruments and Maxim Integrated. Such a mix shift may again be modestly gross margin dilutive in the long term, although we still foresee the firm’s adjusted gross margins hovering in the 70%-71% range, again in line with the firm’s 70%-plus target.