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Why Did ADI’s Stock Underperform Peers?

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How has fiscal 2016 been for ADI so far?

On July 26, 2016, Analog Devices (ADI) agreed to acquire Linear Technology (LLTC) for a 24% premium. This renewed optimism among all analog IC investors, and the stocks of ADI, LLTC, Maxim Integrated (MXIM), and Texas Instruments (TXN) all increased.

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Stock performance

In the past 52 weeks, ADI’s stock rose just 10%, whereas TXN’s stock rose by 43%, MXIM’s rose by 24.8%, and LLTC’s rose by 46.2% in the same period. Notably, LLTC’s stock rose by a whopping 29% on the day when its acquisition by ADI was announced.

ADI’s stock did not rise as high as its peers, and its growth has been subdued in fiscal 2016 (APPL). Notably, ADI has a beta of 1.24, which is lower than TXN’s beta of 1.26 but higher than MXIM’s beta of 1.17 and LLTC’s beta of 1.13. Remember, beta is a measure of volatility, with less than one being less volatile and more than one being more volatile.

Analyst recommendations

Of the 25 Wall Street analysts who monitor ADI stock, 13 issued it a “buy” recommendation, and 12 issued “holds” in August. The stock has a median price target of $70, and it’s currently trading at a discount of 8.6%.

By comparison, TXN has a median price target of $70.27, and it’s currently trading at a premium of 0.4%. The stock has a bullish target of $92, which it will achieve if it reports strong earnings from its Personal Electronics segment or announces a strategic acquisition. Analysts have been stressing TXN’s reignition of its merger talks with MXIM, but neither of the two companies has reacted to analysts opinions.

MXIM has a median price target of $40, and it’s currently trading at a premium of 2.7%. The stock has a bullish target of $46, which it can achieve if it finds a strategic buyer.

Smaller rival ON Semiconductor (ON), which agreed to acquire Fairchild Semiconductor in 2015, has a median price target of $12, and it’s currently trading at a discount of 14.2%.

As of August 19, all the above analog IC (integrated circuit) makers are trading at the high end of their 52-week ranges. Some have already met their median price targets. ADI, too, holds growth potential in the long-term as its merger synergies are realized.

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