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Analog Devices, Inc. Analysis



Company: Analog Devices, Inc.

Ticker: ADI Previous Close: $153.28 (3/2) Industry: Semiconductors


Short-term: Hold

Middle-term: Buy

Long-term: Buy


Fundamental Analysis

All figures are TTM (trailing-twelve-month) to account for the most recent figures from Q1 2021.


Economic Moat:


Free Cashflow

Analog Devices, Inc. (ADI):


Free Cashflow: $1,908,539,000

Revenue ( = Sales): $5,857,949,000 ➤ we can primarily see an upward trend over the past years.

Free Cashflow / Revenue (>5%) = 32.58%➤ This percentage is exceptionally strong, which is also a strength that can be observed over the past years as well. In the past five years, the firm has displayed decent growth too.


Net Margins (> 15%)


Analog Devices, Inc. (ADI):


Net Income (Consolidated) : $1,405,406,000 ➤Generally speaking, ADI's net income can also be seen as having been quite strong in recent years according to this metric.

Revenue : $5,857,949,000

Net Margin = Net Income / Revenue = 23.99% ➤ This is also a very good percentage similar to the firm's cashflows. Again, in past quarters and years, this ratio has been indicative of the firm's strength as well.


ROE (> 15%)


Analog Devices, Inc. (ADI) :


Return on Equity (ROE)= Net Income/ Shareholder's Equity

ROE = 11.71% ➤ This percentage seems to be a bit low at first, but when comparing this percentage to the industry average (between 7.6% and 9.4%) we can see that this is actually quite the good return on equity.


ROA (> 6%)


Analog Devices, Inc. (ADI) :


Return on Assets (ROA)= Net income / Assets

ROA = 6.54% ➤This is a very good percentage when compared to both the usual benchmark of 6% and the industry average of between 3.1% and 4.2%.


Economic Moat Conclusion

Analog Devices, Inc. (ADI): All in all, this company has very good free cashflows which was also the case in the most recent years. ADI's net income is also fairly strong which, in turn, results in the good net margins and ROA seen above. It is also ADI's ROE that at first seems a bit low, but when further analyzed and compared to the industry average, it proves to actually be an excellent metric rating. From all of these factors, it can be concluded that the firm does indeed have an economic moat and interestingly enough, a fairly strong one at that.


Valuation


Analog Devices, Inc:

For this metric, we will use the firm's TTM free cashflow figure of $1,908,539,000. In general, their free cashflows have grown quite strongly over the past five years; however, some recent year values don’t seem to be growing as much anymore. In order to overcome a bias due in part to the very strong growth in 2017, we will assume a yearly growth rate for ADI of 12% in the first five years and 7% after that. Considering their wide economic moat, we need to assume a discount rate of 7%. Using each of these values together, the result is an estimated value of $192.12


Current Price: $153.28 Estimated Value: $192.12 ➤ 18.46% Margin of Safety value which is just not good enough. In this case, we would prefer a percentage value between at least 20-30%. This company does, however, seem to be a great stock with strong financials and a good long-term outlook. To conclude, the current price could be interpreted as either being well-valued or ever so slightly over-valued. More growth in the coming years or a slight decrease in their stock price would bring the safety margin back to interesting levels.

20 Point In-Depth Analysis


1. CEO

Analog Devices, Inc: Vincent Roche is President, CEO and member of ADI's Board of Directors. He has been the president of the firm since 2012 and CEO since 2013. His career at Analog Devices is more prolonged than just those years as president and CEO though. His journey to the top began when he joined Analog Devices in 1988 gaining experience and becoming familiar with the inner workings of the company. Over the years he gained enough experience to start working at several, notable leadership positions within the company strengthening his knowledge that much more. His longevity of working with the same company is certainly remarkable and a great advantage according to any metrics for a strong leader and CEO of a company. Altogether, his resume and long-standing professional history with the company do seem to give the impression that he is capable of leading Analog Devices in the right direction well into the future.


2. Is the company innovative?

Analog Devices, Inc: Innovation seems to be an integral part of their business model. Their focus on matters like 5G, advanced digital healthcare, electric vehicles, and several other sustainable solutions further speak to this firm's innovative qualities. All these previously mentioned markets require Analog Devices to find better alternatives in order to maintain success and stay competitive. A notable event that occurred in 2015 was that ADI was named one of the world’s most innovative corporations by Reuters and this shows that they are doing quite well in this regard.


3. Can the company grow?