Economic Pain Afflicts Analog Devices

On Tuesday, August 19 after-hours, Analog Devices Inc. (ADI) reported Q3 ‘08 earnings of $0.47 per share or $138.6 million vs. $120.4 million or $0.37 per share a year ago. Revenue increased 6.7% to $659 million vs. $617.4 million a year ago. Analysts expected earnings of $0.45 per share on $660.8 million in revenue, missing both earnings estimates and revenue targets. $0.44 per share resulted from continuing operations and $0.03 per share from discontinued operations. On August 20, shares gapped down, opening at $31.14 to close at $29.29, down $2.85 or 9% on over 11 million shares traded, nearly 3x the average daily volume.

50% of the total revenue comes from industrial customers and increased 10% vs. a year ago. Communications customers account for 25% of total revenue and increased 11% vs. a year ago. However, consumer revenue, accounting for 20%, decreased 1% vs. a year ago. Computer customers, accounting for 5% of total revenue, declined 5% vs. a year ago. Analog revenue, which accounts for 90% of total revenue, increased 6% vs. a year ago. DSP revenue increased 14%, converter revenue increased 8%, and amplifier revenue increased 5% vs. a year ago. Gross margins met management’s expectations of 61% vs.60.5%.

ADI has positioned itself to withstand weak economic conditions by diversifying into different products, markets, demographics, customers, and locations. The company’s chips are used in the automotive, medical, telecom, electronics, defense and other industries. In 2007, ADI’s 20 largest customers accounted for 27% of revenue, and the largest customer accounted for 3%. The price war between Intel and AMD has deteriorated average selling prices and will contribute to a deceleration in the memory and microprocessor markets. ADI should be able to sustain itself due to the diversification but will meet greater competition and continued weakness in its consumer and computer units.

Currently 23 analysts publish reports on ADI. There are 13 “Buy” ratings, 9 “Hold” ratings, and 1 “Sell” rating. On August 18 (the day before earnings), Global Crown Capital reiterated their “Neutral” rating and raised their price target to $34 from $32. On August 20, UBS reiterated their “Buy” rating but reduced their price target to $39 from $42. In the past 12 months, insiders have purchased 14,000 shares and sold 172,000 shares. Comparing Q3 to Q2, there was a 20.6% net change in institutional ownership with a net 41.73 million shares sold.

ADI expects to earn between $0.44 and $0.46 per share and revenue growth at 6-9% for Q4. Analysts are expecting ADI to earn $0.46 per share on $676 million in revenue.

In May, the SEC fined ADI $3 million in an illegal stock-options backdating scandal and also fined CEO Jerald Fishman $1 million in civil penalties, $450,000 in restitution, and interest of $42,110 for not properly disclosing $30.7 million in stock-option awards as compensation. The alleged violations occurred between 1998-2002.

Technically, ADI has formed a breakaway gap on strong volume breaking through the 200-day MA in the process, indicating that ADI will see additional downside. I expect a bounce from oversold levels to the $29.5 resistance area and/or at the 200-day MA around $30.5.

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