Friday, August 11, 2006

Calls of Note Part 5

- Morgan Stanley has a very good comment on Analog Devices (NYSE:ADI) noting that like 2004 they would buy ADI on the weakness. The nature, set-up, and timing of these results is very similar to August 2004, when the last semiconductor industry cyclical downturn caused a miss and ADI opened down 7% the next day and closed down only 1%. ADI then went on to advance 23% over the next 3 months.

Cyclical pressures caught up to ADI earlier than expected and drove a 2% revenue shortfall and an EPS miss. firm's F2007 adjusted EPS estimate moves from $2.35 to $2.15. Management is executing to their investment thesis about driving margins higher through improved mix and restructuring, but the reduced revenue outlook is offsetting the benefits of management's actions. ADI should ride out a cyclical downturn better than many of its peers due to its pricing power and diversified customer base.

ADI's P/E multiple is at historically low levels and at a discount to the average semiconductor stock. ADI is trading 13.8x reduced C07 adjusted EPS estimate of $2.31 and this compares with the average semiconductor stock at 16.4x and ADI's historical forward P/E range of 17x-35x.
Firm notes they were pleased to see ADI take advantage of the depressed stock price by buying back 2.5% of its outstanding shares in the quarter (9.3MM shares at an average price of $32.80).

Similar to C2004 the financial markets have done a good job of anticipating the disappointment of yet another industry downturn. ADI has declined 22% from its year to date high in February 2006. The current situation appears very similar to August 2004, when the semiconductor industry was in the early innings of a cyclical downturn and ADI reported an earnings miss for Q3 F2004 (July) and a weak outlook. As of August 12, 2004, ADI had declined 34% from its year-to-date high. The company reported a $0.02 adjusted EPS miss (and a 4% revenue miss) after the market closed on August 12, 2004 and on August 13, 2004 with 2.9x the average 30 day volume, ADI initially traded down 7% to an intraday low of $31.36 before closing down only 1% from the prior day's close at $33.57. During the next 3 months ADI subsequently advanced 23% despite very weak company and industry fundamentals. In other words, the 34% decline in ADI before the earnings disappointment on August 12, 2004 had more than discounted the cyclical downturn for ADI, and we suspect the stock this time around is also already discounting a large amount of bad news. Like 2004, they would buy on the weakness.

Notablecalls: Actionable call! I expect ADI to see a pretty nice bounce today. Anything below $29 level is a strong buy.


TradingCourses said...

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notablecalls said...

Must say I was surprised by the sell-off ADI experienced after the open. Was lucky enough to exit with a small but decent profit.

Better be lucky then good, eh?

Goes to show the semis have more downside in them.