What’s driving optimism among ADI investors?
In the previous part of the series, we saw that Analog Devices’ (ADI) earnings rely strongly on Apple (AAPL) and it’s looking to diversify its customer base by acquiring rival Linear Technology (LLTC). The company is on track to secure necessary approvals and complete the acquisition by calendar 1H17. This acquisition would reduce ADI’s reliance on Apple and stabilize its revenue.
While this may take time, fiscal 4Q16 has been a strong quarter for ADI’s stock, as investors saw the acquisition update and the strong sales of Apple’s iPhone 7 in a positive light.
ADI outperforms peers
In fiscal 4Q16, ADI’s stock price rose 13.8%, outperforming rivals Texas Instruments (TXN) and Maxim Integrated, whose stock rose 13% and 12.5%, respectively, between July and September 2016. ADI’s stock is currently trading at the higher end of its 52-week range of $47.24–$66.91, and so are TXN and MXIM stocks.
With a beta of 1.3, TXN is more volatile than MXIM and ADI, which have the same beta of 1.2. Beta is a measure of volatility with more than one being more volatile and less than one being less volatile.
The strong growth opportunities the LLTC acquisition could bring has created optimism among analysts as well. Wall Street analysts have given a “buy” rating to ADI, whereas they have given a “hold” rating to TXN and MXIM:
- ADI has an average price target of $71 and it’s currently trading at a discount of 8.4%. The stock may come close to this target if it reports strong fiscal 4Q16 earnings and guidance on November 22, 2016.
- TXN has an average price target of $73 and it’s currently trading at a discount of 4.6%. The stock may achieve this target or even surpass it if the company announces an acquisition deal.
- MXIM has an average price target of $42 and it’s currently trading at a discount of 7.3%. The stock may come close to the target if it gets an acquisition offer.
ADI has strong cash flows, profit margins, and cash and debt positions. The only negative point is its heavy reliance on Apple, which causes volatility in earnings. The LLTC acquisition would remove this weakness and put ADI in direct competition with Texas Instruments.
You can gain exposure to all three analog IC (integrated circuits) makers by investing in the VanEck Vectors Semiconductor ETF (SMH). It invests 4.0% of its holding in ADI, 4.9% in TXN, and 2.4% in LLTC.