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

To: Key West who wrote (1130)	11/3/1998 9:59:00 PM
From: Rob C.	Read Replies (3) \| Respond to of 2882

This makes for a good read.... October 30, 1998 SG Cowen Securities Inc. Drew Peck Michael Lins ANALOG DEVICES (ADI - $19 5/16) Mark Grossman CONFERENCE COMMENTS: ADI STRIKES BACK WITH TIGERSHARC; STRONG BUY RATING: Strong Buy ====================================================================== Quarterly EPS FY Oct Revision EPS* P/E Q1 Q2 Q3 Q4 1997A $1.04 20.7 $0.23 $0.25 $0.27 $0.29 1998E $0.87 24.2 $0.29 $0.28A $0.15 $0.15 1999E $1.19 18.1 $0.23 $0.28 $0.33 $0.36 ====================================================================== *Operating Results Key Points: 1. ADI and TXN Engaged In A Point/Counterpoint DSP Duel At The SG Cowen Electronics Conference. 2. In Fact, Both Companies Are Pursuing Different But Well-Conceived Strategies 3. ADI's Management Appears More Confident That The Analog Market Has Stabilized. The management of Analog Devices attended the presentation by TXN, and was well-prepared to defend their DSP technology. In a classic game of technological leapfrog, the company debunked TXN's comments about a DSP performance gap by offering details regarding its upcoming TigerSHARC DSP. They claim the TigerSHARC will provide 4x the computational performance of TXN's fastest C6000 DSP while using considerably less power. As usual, the debate centers on who is actually delivering what. It is clear that, at the moment, TXN is delivering the fastest DSP. It is also clear that, in 1Q99, ADI will be able to make that claim. More important to investors is the fact that the market for pure performance is extremely small compared to the mass market for DSPs and that only bragging rights are really at stake. We are of the strong opinion that the total opportunity for mainstream DSP technology is so large that it is utterly inappropriate to dwell on specific performance claims. As ADI's management pointed out, the DSP business mirrors the analog business in several key aspects. One of those is that each potential design win for a general-purpose DSP chips has different criteria, and that success in the business depends on having a broad array of DSP components that emphasize different characteristics. In the presentations by ADI and TXN, it become obvious that the companies do have a major difference in their product development strategies. TXN appears to be much more focused on the horizontal, with many different standalone DSP components and concentrating on development tools. In contrast, ADI appears to be exploiting its mixed-signal expertise by creating vertical DSP products that tend to be more application-specific and highly integrated. If there is a significant advantage to either strategy, it is way too early to discern. Although ADI is in its quiet period (the quarter ends today), management seemed more confident than they did at the end of last quarter. CEO Jerry Fishman said that "we've established the bottom," suggesting that the flattish forecast is still intact. He also maintained that, going forward, the company would be able to outperform LLTC regardless of the demand environment because ADI is taking market share in those areas where the company overlaps. When asked about the potential for divestiture of unprofitable businesses, he said that the micromachine (airbag sensor) business was still being studied, but that recent higher volumes would trim the associated losses in that business in any event. Bottom Line: Investors have been nervous about ADI because the company had missed consensus expectations last quarter. Although the company's comments were necessarily vague about the quarter, we think that, at least as of yesterday, management was comfortable with current guidance. More important, the company has unusually high operating leverage (for an analog supplier), so that a sustained recovery will result in sharply higher earnings driven by both revenues and gross margins. As with TXN, ADI's mixed signal products offer some resistance to economic uncertainty in 1999. We rate ADI a Strong Buy (1). SG COWEN SECURITIES CORPORATION BOSTON (617) 946-3700 NEW YORK (212) 495-6000 (212) 278-6000 SAN FRANCISCO (415) 646-7200 CHICAGO (312) 704-7400 ALBANY (518) 463-5244 CLEVELAND (216) 621-8300 DAYTON (937) 226-4800 HOUSTON (713) 652-7100 PHOENIX (602) 840-0951 LONDON 44-171-710-0900 GENEVA 41-22-707-6900 PARIS 331-4244-1740 TOKYO 813-3503-0371 TORONTO (416) 362-2229 Further information on any of the above securities may be obtained from our offices. This report is published solely for information purposes, and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any state where such an offer or solicitation would be illegal. The information herein is based on sources we believe to be reliable but is not guaranteed by us and does not purport to be a complete statement or summary of the available data. Any opinions expressed herein are statements of our judgment on this date and are subject to change without notice. SG Cowen Securities Corporation, or one or more of its employees, including the writer of this report, may have a position in any of the securities discussed herein.