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Analog Devices, Inc. (ADI) and More: Should You Buy These 2 Semiconductor Stocks?

The chip market has been facing several headwinds ranging from competitive supply pressure to market transitions. It should thus not be surprising that some stock prices have plummeted while others have soared. Below, I present my take on TI and Analog.

Texas Instruments Incorporated (NASDAQ:TXN)

TI recently released their fourth quarter and full year earningsdata. The report revealed that gross profits are on the decline, most likely due to the fact that their factory is being underutilized while the fixed costs remain unchanged. However, in the quarter, management had actually reduced manufacturing costs compared to other quarters, and this was instrumental in offsetting the low revenues. The analog segment recorded a decrease in revenues in all product lines. The embedded processing segment remains a major growth opportunity. Sales grew y-o-y from the successful sale of communication infrastructure and automotive applications.

At a respective 22.2x and 15.8x past and forward earnings, TI is reasonably priced. Analysts forecast EPS growing by a rate of 9.5% over the next five years. Assuming expectations are met, 2016 EPS will come out to $2.78, which, at a multiple of 18x, translates to a future stock value of $50. Discounting backwards by 10% yields a present value of $31, so the stock is more or less fairly priced.

Analog Devices, Inc. (NASDAQ:ADI)Analog Devices, Inc. (NASDAQ:ADI)

Analog Devices is a leading manufacturer of a range of devices related to signal processing. The Street rates Analog Devices a “buy.” The reasons they give for this rating include the company’s reasonable debt levels, operational execution, and healthy stock performance–shares are at their 52-week high after rising 38% from the lows. The company also has increasing profit margins and attractive cash flow from operations. In the fourth quarter and fiscal 2012, revenue increased by 2%, and diluted earning per share grew by 4%.

The company has also been named among the 100 most innovative company by Reuters. It is the second time in a row that the company has been awarded such an honor. Analog Devices has won other prestigious awards such as the “top 100 greenest companies.” It should also be given credit for being one of the more appropriate supply managers. While other companies churn out goods like there is no tomorrow, Analog manages its inventories prudently. This can be seen in how the company responded to low demand by cutting production to lower levels and promised to do so again in 2013 unless macro trends suddenly reverse.


I have already expressed that Texas Instruments is reasonably priced. I share that sentiment for Analog. My more optimistic outlook in the chip market is represented in my take on QUALCOMM, Inc. (NASDAQ:QCOM) . This semiconductor producer focused on the mobile market and is thus poised to gain, particularly from smartphones. With no debt and a current ratio of 3.4x, risks are relatively low. At the same time, the stock is surprisingly cheaper than TI and Analog at only 19.7x past earnings. It should thus be of no surprise that the Street is calling it a solid “buy.”

The article Should You Buy These 2 Semiconductor Stocks? originally appeared on and is written by David Gould.

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