Analog Devices, Inc. (ADI)’s Recovering Business Makes it Worth a Look

The day on which semiconductor player Analog Devices, Inc. (NASDAQ:ADI) closed in on its 52-week high turned out to be the day when it posted disappointing earnings. The company missed estimates on both top and bottom lines and issued a cloudy forecast for the ongoing quarter. Analog’s revenue estimate of $647 million to $672 million for the current quarter is behind the consensus of $666 million at the mid-point, as it wades through macroeconomic weakness.

However, Analog managed to appease investors to some extent as it bumped up its quarterly dividend by 13% to $0.34 per share, which translates into a forward dividend yield of 3%. This probably saved the stock from a huge sell-off, but it’s still down 4% since reporting earnings last Tuesday.

The fact that Analog still trades within 5% of its 52-week high might lead investors to believe that there isn’t much upside left. In addition, sluggishness in end markets is another reason which works against the company as an investment. However, it is showing signs of a recovery and it won’t be prudent to write off Analog completely, since it is a stable stock and provides a decent dividend as well.

The stock has appreciated around just over 13% in the last one year, but might see some tough times ahead after a weak earnings report and outlook. Thus, investors could probably think of adding to their Analog position when the stock is down since it expects a recovery is on the way. But will it be the right thing to do? Let’s check.

Hitting bottom

Analog witnessed tepid sales in the early part of the previous quarter, but saw an improvement towards the end. According to management, order rates are now better than before and continue to be strong. Analog’s confidence stems from the fact that its industrial customers are expected to perform better in 2013. Industrial customers have kept their orders below consumption and they are probably through with inventory de-stocking, which could be one of the reasons behind improved order rates.

In addition, Analog expects the industrial market to provide it with opportunities for its analog signal processing business. It expects machine automation, power grid management and precision instrumentation to increase its addressable market in the future. Also, an increase in auto sales over the past year and expectation of further growth in the future are catalysts which Analog Devices expects to ride.

The industrial and automotive business contributed 62% to the company’s total revenue in the previous quarter. But both were down on a year-over-year basis, with industrial declining 3% and automotive falling 11%. However, if the recovery about which management speaks is indeed true, and the previous quarter was indeed a “trough,” then Analog can surely expect better returns from these businesses in the future.