EUR 850.00 For Business Accounts Only

Morningstar | Analog Devices Still Has the Pieces to Put Together Strong Automotive Revenue Growth; FVE Intact

We met with wide-moat Analog Devices at CES 2019 in Las Vegas and came away from the company's product demonstrations with ongoing confidence that the firm can return to high-single-digit automotive chip revenue growth in the long term (barring any near-term macroeconomic or trade headwinds). Across CES and at Analog, we continue to see strong secular tailwinds around the rising tide of additional chip content per automobile, as the push for safer, greener, and smarter vehicles is being met by a wide variety of semiconductor-related content. Analog's car-related content in radar, audio cables, battery management systems, biometrics, and other areas bode well for the firm's ability to maintain, if not grow, share of the automotive chip pie in the long term. We will maintain our $96 fair value estimate for Analog and view the firm as modestly undervalued. We like this high-quality name in the event of any pullbacks.

Analog's automotive chip growth has lagged peers in recent years. The main culprit of its relative shortfall is a decline in legacy MEMS sensors used in airbags, where Analog has stated that the business became a bit more commoditized and the firm walked away rather than succumb to lower pricing. Linear Tech's battery management system (BMS) also conceded some market share as competitors were aggressive on price and were able to win new designs.

More recently, Analog has been bullish on automotive and expects these legacy headwinds to subside, in order to drive high-single-digit automotive growth in the long term. We still see no reason to believe that the firm is suffering in terms of automotive chip innovation. Although fiscal 2019 might be sluggish if light vehicle unit sales stagnate or decline, we project high-single-digit sales growth (7% per year) for the firm in the long term on a midcycle basis.

One area where Analog continues to invest in R&D is in automotive radar. The company displayed its Drive360 radar module, based on a relatively advanced process node at 28 nanometer (nm) CMOS. This device might be one of the best examples of Analog's collaboration with acquired entities as the modules includes chip content from organic Analog Devices Inc., Linear Technology, and Hittite.

Analog also showed off its biometric fingerprint solution for the automotive space. We heard from more than one CES vendor that automotive manufacturers (and particularly the newer entrants in the car industry) want to enhance the authentication process for car owners. Such functionality will provide security to the vehicle (only authorized drivers can turn it on) and enhanced settings (seat location, radio stations, etc. pre-set for each user) for car owners. Analog believes that its fingerprint solution can be used as one such method in high end, luxury vehicles. A driver that pushes the start button on the vehicle might be able to have his or her fingerprint recognized as an added authentication layer.

When we visited Gentex, a leading automotive parts supplier, we were impressed with its iris recognition technology, which used the car mirror to detect the driver's eyes in order to authenticate the car owner. We view both solutions as trying to get to a similar place--when a person enters the driver's seat of the car, the vehicle should automatically engage with the owner, prevent non-owners from driving, and shift to the owner's preferred vehicle settings. As several luxury OEMs may seek to add authentication, we think there's room for several vendors in this field and Analog might be in the mix for such design wins in the future.

Analog also touted its A2B audio bus solutions, which have been gaining traction in the market over the past few years and have been adopted by 12 car OEMs, per management. The solution involves the transmission of high quality audio signals over a low cost, twisted pair wire, rather than bulky cable harnesses. Analog claims that A2B leads to a 75% cable weight reduction, helping car makers squeeze every ounce of fuel efficiency out of the vehicle. Finally, we saw Analog's "Steer by Wire" sensor solution, which is used for measuring electrical power steering and is aiming to replace hydraulics used in current systems, as the hydraulics may wear out due to friction over time.