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Analog Devices (ADI) Q2 Earnings: What's in the Cards?

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Analog Devices, Inc. (ADI - Free Report) , one of the world leaders in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing integrated circuits, will report second-quarter fiscal 2017 results on May 31, before the bell.

The company’s earnings surprise history has been impressive as it has surpassed estimates in each of the last four quarters with an average positive beat of 14.14%.

Shares of Analog Devices have outperformed the Zacks Semiconductor - Analog and Mixed industry over the last one year. The stock returned 41.7% while the industry gained 36.9%.

Let’s see how things are shaping up for this announcement.

Factors at Play

Analog Devices has completed the acquisition of Linear Technology. The merger of these two companies is expected to create an analog industry leader across a huge range of products, customer breadth and scale.

The deal will significantly expand Analog Devices' total addressable market allowing it to cater to phenomenal demand in some of the most attractive markets such as industrial, automotive and communications infrastructure markets.

The acquisition is expected to be accretive to the company’s revenues in the soon-to-reported quarter. Analog Devices expects the deal to add revenues between $160 and $170 million in the second quarter of fiscal 2017. This guidance includes a reduction of approximately $30 million related to a purchase accounting adjustment for Linear’s North America distributor deferred revenues.

Also, the company expects its non-GAAP interest and other interest expense to be approximately $60 million in the second quarter, $70 million in the third quarter and $60 million every quarter thereafter.

Analog Devices has been benefitting from strength across all the markets - industrial, automotive, consumer and communications, and increased focus on innovation and operational execution. While its investments are aimed at strengthening the product line and countering increasing competition, the policy of returning cash through dividends and share buybacks will ensure investor loyalty.

For the second quarter, management expects revenues in the range of $870 million to $950 million. On a non-GAAP basis, the company estimates gross margin of approximately 66.5% to 67.0%. Operating expenses are expected to be down 3% to up 1%. The company expects interest and other expense of approximately $30 million, tax rate of approximately 8% and earnings per share in the range of 74–86 cents.

Analog Devices, Inc. Price and EPS Surprise

Earnings Whispers

Our proven model does not conclusively show that Analog Devices will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 85 cents. Therefore, the Earnings ESP for the stock is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Analog Devices carries a Zacks Rank #3, which when combined with an ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some stocks that you may want to consider as our model shows these have the right combination of elements to post a positive earnings surprise:

Teradyne, Inc. (TER - Free Report) , with an Earnings ESP of +2.38% and Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Lam Research Corporation (LRCX - Free Report) , with an Earnings ESP of +1.66% and a Zacks Rank #1.

DST Systems, Inc. , with an Earnings ESP of +0.64% and a Zacks Rank #2.

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