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?
Analog Devices, Inc: Their focus on innovation and more specifically, on many sustainable and growing technologies, will enable them to grow in the future years. Technologies such as 5G, advanced digital healthcare, and electric vehicles, which ADI is working on, have immense potential for changing the future in a positive way. For Analog Devices to be a part of this technological revolution is most certainly a great opportunity for the firm and shareholders alike. Further, if this opportunity is managed properly then it would enable them to grow exponentially in the coming years.
4. How does the company grow?
Analog Devices, Inc: As explained in the previous point, innovation will be the main catalyst to driving growth for the company. The specific areas they are currently focusing on are; vehicle electrification (including longer range, faster charging, and safer operation) autonomous transportation, digital health, 5G solutions (including instrumentation, infrastructure, and emerging applications), and Industry 4.0 solutions (which promises exponential improvements in productivity, flexibility, and safety). Overall, the markets that ADI is focusing on seems to have a good outlook well into the future. Analog Devices’ role in these markets has a high probability of helping them thrive as long as they continue to play their hand well.
5. Is the company a market leader?
Analog Devices, Inc: They rank among some of the largest named companies in the semiconductor industry. One of their biggest competitors is Texas Instruments, which is also a very interesting stock and strong competitor. Altogether, it could be said that they don’t have “absolute” market leadership, but what they do have is a good market share and a strong position in the market.
6. Is their market leadership safe?
Analog Devices, Inc: The main factor protecting their market leadership and market share against competitors is the firm's economic moat. In that regard, they are doing quite well. Additionally, ADI's financials and key ratios are good enough to offer protection against competition. Still though, they are in a fierce business environment where continuous innovation is key to long-term survival and future success.
7. Is there foreign exchange risk or commodities risk?
Analog Devices, Inc: They are, in fact, influenced by exchange risk and commodities risk.
8. How are their profit margins?
Analog Devices, Inc: The firm has a net margin of 23.99% which is pretty good. When looking at past years, good profit margins can be observed as well. Of course, it should be remembered when investing in a company and looking for factors indicative of future success, the past is no predictor for the future. Though this should be considered to be a standard, past successes do provide some level of confidence in the firm's abilities to generate good profits.
9. How much capital does the company need?
Analog Devices, Inc: As stated in previous points (mainly points 2,3 and 4) innovation is an integral part of their business. On the flip side, or the Catch 22 so to speak, innovation often doesn’t come cheap and requires a sizable amount of capital. The capital that is needed for this can be provided in two ways. Either the company uses its cashflows to finance these activities or debt is used. In the case of Analog Devices, it can be seen that they have good cashflows to finance their activities and that they are not over-using debt which is great.
10. Does the company have a loyal customer base?
Analog Devices, Inc: It seems, according to this factor, that ADI is more on neutral ground here. They do offer great products which in turn creates happy customers. In fact, they have quite a wide customer base of more than 120,000 customers. In order to reach and maintain this large customer base, immense value was created by the firm on behalf of customers. As with many strong companies, a form of lock-in can be observed in this particular case. Mainly lock-in occurs with ADI via switching costs which seems to be most applicable in their case. This lock-in mechanism certainly creates a distinctive “loyal” customer base, but this may not be with great strength which is why this aspect could be considered neutral.
11. How much cash does the company produce?
Analog Devices, Inc: They have very high free cashflows relative to revenue. In most of the past years, this was also the case even though growth seems to have slightly decreased.
12. What is their value creation over the past ten years?
Analog Devices, Inc: The firm has seen an increase of 474.63% over the past ten years, which is better than most companies. Past results should again not be seen as a predictor of future performance, but it does indicate that a company, at least, has some idea of what it is doing and been relatively successful as well.
13. Can the company pay its bills?
Analog Devices, Inc: They have a quick ratio of 1.20 and a current ratio of 1.57. This means that they can pay back their current, short-term debt which is good.
14. How does the company finance itself?
Analog Devices, Inc: As stated in Point 9, they use both their cashflows and their debt. Their cashflows are sufficient to finance a large part of their activities. They also use their debt in a controlled manner which is normal at the currently low rates seen with this firm.
15. How much debt does the company have?
Analog Devices, Inc: Long-Term Debt: $4.75B Shareholders Equity: $12.09B ➤Debt to Equity Ratio: 0.39 ➤ This is significantly lower than 1 which is good. This metric is indicative of the firm not taking on too much long-term debt and that future burdens won’t be too large or costly.
16. What is their Piotroski F-score?
Analog Devices, Inc: 6/9 ➤This is a decent rating and can be considered as average.
17. What is their P/E-Ratio?
Analog Devices, Inc: 41.12 ➤This is quite a high ratio which could indicate that the market expects strong growth from them.
18. What is their P/B-Ratio?
Analog Devices, Inc: 4.76 ➤ Honestly speaking this is too high for the ratio standard but not too extreme.
19. What's with their EV/EBITDA Ratio?
Analog Devices, Inc: 24.86 ➤ This is also high, similar to the other valuation ratios seen above.
20. WACC?
Analog Devices, Inc: 8.58% ➤ This is an average percentage that results in a normal valuation.
Total Score
Analog Devices, Inc: 14/20 ➤ All in all, this is a good score but moving forward it shouldn’t fall any lower. It seems as though ADI's financials and most of their financial ratios are good in addition to them scoring well on many non-financial factors. To end, they are a strong company with many interesting attributes which makes them a good contender as a stock for one's long-term portfolio. Currently, their valuation does seem to indicate that they are either well-valued or slightly over-valued, which should certainly be taken into account but with all factors considered, this seems to be a solid firm and stock.
All the information provided is personal opinion and not directly applicable financial advice. I have no ties to the above company and am not being compensated on their behalf for the writing of this analysis. You should make your own decisions based upon evidence and what you believe is best for you and your financial well-being i.e., conducting your own due diligence.