Monday, November 20, 2006

Calls of Note Part 4

- Merrill's Joe Osha notes they had a chance to spend some time with Analog Devices' (NYSE:ADI) CEO Jerry Fishman following the publication of results last week. Firm was interested in drilling down on the potential for margin improvement at ADI, and they also questioned Fishman about how the competitive environment is changing.

In some ways, ADI looks like a tempting investment. There's plenty of cash flow and an obvious set of potential improvements. Management has been suggesting for two years that something positive is in the works on the money-losing DSP business. Simply waiting for things to get better is an easy route to take.

It is not, however, a strategy that's likely to work in ML's opinion. As they work through the numbers, it's hard to find any margin improvements that aren't in their estimates, and they see little evidence that change is coming. Firm also notes that ADI is no longer outgrowing the industry in either the data converter or amplifier markets.

At 13.6 EV/2007 EBITDA, the stock looks too expensive for a buyout, and it's also expensive relative to its peers. Even crediting ADI with sustained 10% growth and 26% GAAP operating margins, ML's fair value model suggests a normalized fair value of $34. They don't see investors making money from here. Maintains Neutral.

Notablecalls: I'd be tempted to put out a small short position on ADI following the call. Just because I feel there are too many longs already in it and ML's call will leave them somewhat uncomfortable.

No comments: