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Bull of the Day: Analog Devices (ADI)

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Based in Norwood, Massachusetts, Analog Devices (ADI) is an original equipment manufacturer of semiconductor devices, specifically, analog, mixed signal and digital signal processing (DSP) integrated circuits. They are the second largest producer of analog chips after Texas Instruments.

Analog chips are used primarily in smartphones for managing radio signals and other purposes. These chips convert real world signals into digital signals. Apple is Analog's one of the biggest customers.

Solid Quarterly Results and Upgraded Guidance

The company reported excellent results for its third quarter fiscal 2016, beating on both the top and bottom lines, and also raising its guidance for the current quarter.

Adjusted earnings for the quarter were $0.82 per share, ahead of the Zacks Consensus Estimate of $0.76 per share, thanks to strong growth in its automotive and communications businesses.

The management expects EPS of $0.84 to $0.94 and revenue of $910 million to $970 million for Q4.

Acquisition of Linear Technologies

In August, the company announced the acquisition of another analog chipmaker Linear Technology for about $14.8 billion. Linear Technology produces power management, data conversion, signal conditioning, RF and interface ICs, uModule(R) subsystems, and wireless sensor network products.

Recently the two companies announced that they had obtained antitrust clearances in the US and Germany and expect the deal to completed in the first half of 2017, subject to receipt of remaining regulatory approvals.

The merger is expected to reduce Analog’s reliance on Apple while adding product categories like power-management chips for handsets, which are one of the market’s fastest-growing areas per RBC Capital. It will create a stronger rival to Texas Instruments.

Rising Estimates

Analysts have raised their estimates for the company after strong earnings and upgraded guidance. Zacks Consensus Estimates for the current and next year are now $2.91 per share and $3.33 per share, up from $2.90 and $3.31, 30 days ago.

The company has a pretty good record at beating estimates. They have beaten consistently for the last 13 quarters; the average quarterly beat for the last four quarters was 10.22%.

Returning Cash to Shareholders

Their dividend yield is 2.62% currently.  Over the past 12 months, they returned approximately $1 billion to shareholders via dividends and buybacks. They have been raising their dividend consistently and their plan is to grow the dividend by 5% to 10%.

Positive Industry Outlook

“Semiconductor-Analog” industry is currently ranked 52 out of 265 Zacks industries (top 20%). While some of the traditional businesses for chips have slowed down, many newer growth areas have emerged, leading to rising demand for better and faster chips.

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Disclosure: I own shares of ADI in the Income Investor portfolio.

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