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Can Analog Devices (ADI) Spring a Surprise in Q3 Earnings?

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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 third-quarter fiscal 2017 results on Aug 30, before the bell.

The company’s earnings surprise history has been much impressive as it has beaten estimates in each of the last four quarters with an average positive beat of 18.6%. The stock, however, has underperformed the industry year to date. It has gained 8.7% compared to the industry’s rally of 14.8%.

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

Second-Quarter Snapshot

Analog Devices generated revenues of $1.15 billion, up 16.6% sequentially and 47.4% year over year. The year-over-year increase was attributable to improved performance across all markets.

The company completed the acquisition of Linear Technology which contributed $208 million to revenues.

Factors at Play this Quarter

The merger of Linear Technology with Analog Devices has created an analog industry leader with an extensive range of products, customer breadth and scale. The deal has significantly expanded 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.

These positives along with the integration process are expected to make more meaningful contributions in the to-be-reported quarter.

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

For the third quarter, management expects continued sequential and year-over-year revenue growth and revenues in the range of $1.37 billion to $1.45 billion. On a non-GAAP basis, the company estimates gross margin of approximately 69% to 70%. Operating expenses are expected between $430 million and $440 million.

The company expects interest and other expenses of approximately $70 million, tax rate of approximately 10% and earnings per share in the range of $1.07 to $1.21.

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: The Most Accurate estimate stands at $1.14, while the Zacks Consensus Estimate is pegged at $1.15. Therefore, the Earnings ESP for the stock is -0.64%. 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 increases the predictive power of ESP. However, the company’s negative ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 and 5 (Sell rated) going into the earnings announcement.

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:

InterDigital (IDCC - Free Report) , with an Earnings ESP of +10.45% and a Zacks Rank #1.

Applied Materials (AMAT - Free Report) , with an Earnings ESP of +2.34% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CACI International (CACI - Free Report) , with an Earnings ESP of +1.09% and a Zacks Rank #2.

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