News re ADI, Chk It Out!
The Wall Street Journal -- March 4, 1998
NEW ENGLAND JOURNAL
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Heard in New England:
Analog Devices Can Make a Name
For Itself in Move to Digital Chips
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By John Hechinger
Staff Reporter of The Wall Street Journal
Some investors are starting to slide their chips over to Analog
Devices.
Their bet comes after a less-than-stellar year for the Norwood,
Mass., semiconductor maker, whose products find their way into
digital cellular telephones, modems and high-performance personal
computers.
Last year, sales rose an anemic 4%, to $1.2 billion. One of the
problems: a slowdown in orders from major cellular
communications companies, made worse by the turmoil in
Southeast Asia.
But recently the company indicated that its fiscal first quarter,
ended Jan. 31, would mark the low point for its wireless
communications customers. That sent a strong signal to Wall
Street. The stock, which had been selling in the mid-$20s earlier
this year, has now jumped to about $31.
Mathews Cherian, a portfolio manager with David L. Babson &
Co. in Cambridge, Mass., says the stock is just starting to come to
life. Late last month, the firm's Babson Growth Fund bought
225,000 shares, a less than 1% stake, and is looking to buy more.
Mr. Cherian says he likes the growth potential of Analog's markets.
Over the next few years, he's confident that the company can boost
its sales 20% to 25% and earnings 25% to 30%. So, using his most
conservative estimates, he figures the stock could reach the
mid-$40s by year end.
"It's a company that is in many ways at the right place at the right
time with the right skills," Mr. Cherian says.
Although many technology stocks are no longer looking so cheap,
Mr. Cherian and other analysts contend that Analog Devices still
sells for a reasonable price. The stock market values Analog at $5
billion, or 23 times its projected fiscal 1998 earnings, according to
a survey of 17 analysts by First Call, the Boston research firm.
That's certainly not a steal, since it falls in line with the analysts'
projected long-term earnings growth rate of 24%. But since the
company's fiscal year ends in October, fans suggest measuring
earnings against Analog's fiscal 1999 results. By that yardstick, the
stock sells for a more palatable 19 times the consensus Wall Street
estimate.
For an even more flattering comparison, Mr. Cherian and others
note that rivals Linear Technology and Maxim Integrated
Products, with only slightly higher growth rates, recently traded at
more than 30 times 1998 earnings.
So, what exactly does Analog Devices do? The company's products
hold the key to high-tech devices that process real-world
information, such as sound or images. Its specialty: making
integrated circuits that can process those complex signals and then
convert them to digital ones for storage and manipulation on a
microprocessor.
Traditionally, the company has focused on the less technologically
sophisticated linear, or analog, semiconductors. It's a highly
profitable business with long product cycles, little competition and
a scarcity of design talent scaring away new entrants. For example,
Linear and Maxim maintain gross profit margins of about 70%.
Analog Devices, however, has margins of only 50%. That's because
the company has been moving into the faster-growing -- but more
competitive -- field of digital-signal processing, or DSP, which now
makes up about a quarter of its sales.
That technology, the segment suffering from the slowdown, forms
the core of the latest telecommunications devices, including digital
cell phones.
But as that business improves and the company builds on its
success in the analog field, Mr. Cherian says the company can now
improve its margins as much as five percentage points -- an upside
that isn't fully factored into Wall Street's estimates, or the
company's stock price. Some recent news has been promising. The
company has forged powerful ties with industry powerhouses. For
example, 3Com is using Analog's chips in a modem that will begin
shipping this month. And, last month, the company said
Electrolux, the appliance manufacturer, had selected Analog in a
competitive bid to supply chips to control the speed of its
refrigerator compressor motors.
Another plus: Analog recently made Fortune magazine's annual list
of the 100 best companies to work for in America, which may help
it attract designers. The magazine credited the "humanistic culture
set by its founder and chairman, Ray Stata." The company, the
report said, features "a brainy, open environment and a much softer
culture than some of its dog-eat-dog competitors."
To be sure, Analog's competition is formidable, especially in the
DSP field, where it faces such goliaths as Texas Instruments,
Lucent Technologies and Motorola. Meanwhile, with 25% of its
sales in Asia last year, Analog still has some exposure to the
economically troubled region. Drew Peck, an analyst with Cowen
& Co. in Boston, says Asian fears hang like a dark cloud over much
of the semiconductor industry.
Analog executives say the company has already proved it can
compete in carefully chosen niches. One example: It displaced
Texas Instruments to win 3Com's business. "You pick your spaces
very carefully," says Jerald Fishman, Analog's president and CEO.
"In those spaces, you try to dominate."
As for Asian concerns, Mr. Fishman says, Analog already felt the
worst impact in its first quarter. "We believe it was the low point of
the cycle," he says.
Indeed, Mr. Peck figures that Analog holds a better position than
many chip makers because its major competitors aren't based in the
Far East, where producers are expected to drive down prices. He
also thinks investors will continue to benefit from the company's
traditional analog business, which makes up three-quarters of sales
and can act as a buffer in tough times. So he rates the stock a
strong buy with a $40 year-end price target.
"Analog is less glamorous," Mr. Peck says. "But the truth is, it's
much more profitable."
Erika Klauer, an analyst with BT Alex. Brown in New York., likes
Analog's move into higher-margin segments of its linear business,
such as power management for computers. Meanwhile, she figures
the DSP business, growing at 30% a year, will be a powerful
growth engine in the next few years.
"It's probably the favorite stock in our coverage universe," she says.
"The stock has outstanding prospects for 1998 and 1999."
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Big Plug: SS&C Technologies soared 44%, to $17.50, last week
after the Bloomfield, Conn., software and consulting company
posted fourth-quarter earnings, excluding a one-time charge, of 12
cents a share, beating analysts' expectations by a penny. BT Alex.
Brown upgraded the stock to "strong buy" from "buy."
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Power Networking: Concord Communications, Marlborough,
Mass., rose 21%, to $28.75, after the software company
announced an agreement with NetScout Systems of Westford,
Mass., to produce network monitoring systems.
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Shocked Investors: ACT Manufacturing plummeted 31%, to
$12.06, after the Hudson, Mass., electronics manufacturer
postponed reporting fourth-quarter results and full-year 1997
results, citing a "significant" inventory shortfall that could result in a
1997 loss.
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Grim Face: Viisage Technology, Littleton, Mass., fell 18%, to
$5.94, after Needham downgraded the fraud-detection system
provider to "hold" from "buy."
---
Strong Progress: Progress Software rose 15%, to $25.38, after
Fahnestock said it was initiating coverage of the Bedford, Mass.,
company with a "buy" rating.
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Doctor's Orders: IDX Systems jumped 14%, to $41.38, after the
Burlington, Vt., company entered an agreement with ProxyMed of
Fort Lauderdale, Fla., to develop and market automated
prescription-management tools for physicians.
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Bad Connection: SpecTran, Sturbridge, Mass., fell 11%, to $8.81,
after the fiber-optics company announced that 1998 earnings
could be as much as 30% lower than 1997. SpecTran cited higher
development costs and lower selling prices.
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Losing Bet: TransAct Technologies dropped 10%, to $10, after
the Wallingford, Conn., company said it could miss out on $5
million in revenues this year because of a proposal in South
Carolina to ban video poker in the state. The company makes
printers for video poker terminals and said prospects of the ban
had already trimmed $1.6 million from TransAct's first-quarter
sales. |
