Wednesday, August 22, 2007

Analog Devices Inc (NYSE:ADI): Color on quarter

Couple of firms comment on Analog Devices Inc (NYSE:ADI) after the co whose chips translate real-world signals like pressure, temperature and sound into digital signals reported its Q3 results last night:

- Banc of America notes Oct. qtr sales are forecasted to grow 2% Q/Q to $695m at the mid-pt of guidance - in line with Street expectations. They believe the outlook reflects some conservatism, given strength in orders throughout the qtr. (+7% Q/Q), the higher backlog (+2%), a healthy book-to-bill (1.05), and lean channel inventory. Importantly, ADI's commentary is also suggestive of the persistence of a favorable backdrop for the chip group.

An unfavorable mix and a goal to further reduce inventory (via lower utilization) is preventing near-term GM expansion. This trend is however likely to reverse in Q1 as a richer mix of higher margin industrial relative to consumer, an improvement to GMs in the MEMS business (via outsourcing of production), and an increase in utilization (inventory rebuild) will prove accretive to GMs. In addition the firm believes that higher sales, coupled with tight op-ex control, a potential sale of the wireless DSP business, and aggressive stock buybacks will help drive earnings leverage (albeit at a slower than ideal pace). Maintains Buy and $44 tgt.

- Morgan Stanley thinks bears can pick on the lack of gross margin expansion in the FQ4 guidance and flat to up 4% Q/Q revenue guidance. However positives include 7% Q/Q bookings growth, 6% Q/Q growth in power management (an emerging business for ADI), very positive secular trends in MEMS, 1.8% dividend yield, 5.2% of shares repurchased with another $1B authorized, and firm's continued confidence management is continuing to hone its product focus that should drive improved earnings power (which should be demonstrated with the anticipated near term divestiture of their lower margin wireless handset business).

With expectation the sale of the wireless handset business is very near (high probability in next 3 months) we could see the stock move up into the $39-$41 range (depending on the sale price and what is included) in the near term. MSCO's above consensus F2008 estimates are unchanged and their 12-18 month stock price target remains $48 with a bull case target of $60. Maintains Overweight.

Notablecalls: ADI is among the best names in the space with healthy cash flow and a very diversified customer base. The stock was down $0.50 in after hours action due to lack of GM upside in guidance. The analysts are making a solid case about things getting gradually better in H2 and that should help the stock. Also note that MSCO sounds very confident regarding the sale of the wireless business. This may mean the analyst at MSCO knows something the rest of us don't. Deals like this one usually get announced some weeks after the quarterlies.

With the stock down in after hours and the market looking very positive this AM, I think buying ADI tad below the close makes sense for a quick trade.

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