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Technology Stocks : ADI: The SHARCs are circling! -- Ignore unavailable to you. Want to Upgrade?

To: Scrapps who wrote (2056)	8/28/2000 2:05:49 AM
From: Junkyardawg	Read Replies (1) \| Respond to of 2882

Monday August 28, 1:30 am Eastern Time individualinvestor.com Analog Devices: The Broadband Revolution's Chip Supplier Research Analyst: Will Frankenhoff (08/28/00) We all know the semiconductor industry is subject to huge cyclical swings, swings that generally last two to three years and can either be incredibly painful or profitable for investors. Nowhere is this ``volatility'' better expressed than in The Philadelphia Semiconductor Index (SOX). During the most recent industry downturn, the SOX fell more than 49% from a high of 381.6 in September of 1997 to a low of 193.5 in August of 1998. Likewise, the rebound of the last year is also amply demonstrated by the fact that the SOX had advanced more than 118% over the past 52 weeks and is up a whopping 64% year-to-date. While all semiconductor companies are benefiting from this upswing, and will continue to benefit for the next six months, there is one we especially like: Analog Devices (NYSE: ADI - news). The company is the world's leading provider of analog and mixed-signal chipsets to the wireless market and a strong player in the rapidly growing market for digital signal processors (DSPs). The stock suffered more than its share of volatility from March through August, but is still up solidly for the year to date. After losing $3.19 on Friday, the stock closed at $93.19. Investors obviously agree as shares have advanced nearly than 300% over the past year on the heels of four consecutive quarters of fast growth in which revenue has grown at an average 66% clip and earnings have advanced an average 167%. Even more impressive is the acceleration in revenue growth in each of the past four quarters capped by the most recent quarter ended July 29. In that three month period, revenue grew to $700.7 million, up 85% over the same period in the prior year. Earnings growth was also impressive as the company reported earnings of $0.43 per diluted share, up 186% over the $0.15 reported in the same quarter a year earlier. While we will not say that such results are sustainable indefinitely, we'd like to note that analysts have recently raised their estimates for the October 2000 fiscal year by an average $0.15 per share to $1.50. This implies earnings growth in excess of 183%. For 2001, estimates have been boosted by an average $0.50 per share to $2.41. That comes to a growth rate of 61%. However, we believe that these estimates could prove conservative depending on Analog's continued penetration of the communications market, which is currently 45% of revenue, and the deployment of various products ranging from ADI's ADSL chipset to its high performance analog converters and amplifiers. It should be noted that the vast majority of the communications products remain focused on wireless infrastructure and broadband access, not handsets which generated a mere 5% of sales. Analog's converters and amplifiers currently account for close to 50% of total revenue and represent two of the most important areas going forward since they help to bridge the divide between the analog and digital worlds. These products add considerable upside potential in the face of growing demand. The other key ingredient for Analog's continued success is demand for its DSP products. It should also be noted that Analog experienced DSP revenue growth of 71% in fiscal 1999, or close to three times the market's overall growth rate of 25.5% as estimated by market research firm Forward Concepts. Much of this growth is attributable to the staggering growth in telecommunications bandwidth. Products like Analog's ADSL (Asynchronous Digital Subscriber Line) chipsets make it possible for the installed infrastructure of copper wire to provide Internet access that is 100 times faster than today's methods. Little wonder that Analog announced in November that it had shipped its millionth ADSL chipset and that analysts expected Analog to ship more than 4 million sets in 2000. Currently 75% of all DSL modems include the company's products. What's more, Analog's DSP customer base includes more than 10,000 customers, including companies like Lucent Technologies (NYSE: LU - news) , Cisco Systems (NASDAQ: CSCO - news) and Hyundai. Many complex DSP systems require analog components for interoperability on existing infrastructure, and each time Analog supports a solution (such as ADSL), it is enabling itself to increase its sales of high-margin products such as the analog converters and amplifiers. The company also excels in R&D, which has in turn led to Analog enjoying a high level of customer confidence in new products. We believe that close to 50% of total revenue was generated from products introduced over the past 18 months is a good sign. Finally, Analog has been showing impressive gains in both its gross and operating margins. The gross margins are up 150 basis points sequentially to 57%, while operating margins have risen 350 basis points to 33%, and are at their highest level since the early 1980s. We believe that further improvements are possible, albeit not at these levels as the company ramps up to full utilization and moves test and assembly manufacturing to low-cost facilities in the Philippines. Strong top-line growth should allow Analog to leverage its operating expenses and improve operating margins to its newly stated goal of 35%. Bottom Line: Using an average of expected earnings growth through 2001, we expect shares to trade at 60 times 2001 estimates of $2.41 or $128 per share over the next twelve months. Incredibly, this estimate could be conservative depending on the performance going forward.