Analog Devices Inc.

(ADI) Stefan Cordova

Date: 2/19/09 Consensus 01/09 10/08 10/09
Estimate A E E
Sector: Technology EPS 1.46 .55 .82
Industry: Semiconductor- P/E 13.28 35.27 23.65
Broad Line
Current Price: 19.40 Long Term Growth 14.40
Rate:
52 Wk Price Range: 15.29-36.35 Ratio Co. Indus. Secto SP50
Analysis r 0
Ave. Daily Vol: 5,798,040 P/E (TTM) 13.7 6.67 5.55 12.60
8
Beta: 1.07 P/S (TTM) 2.38 0.49 0.44 1.57
Market Cap 5.65B P/B (MRQ) 2.43 1.19 2.17 2.51
($million):
Shares Out 291.19M ROA (TTM) 14.1 1.40 2.45 5.79
(million): 4
Inst. Hold %: 2.02% EBO Valuation 10.30
Div Yld: 4.00% Recommendation Buy
:
Total Debt/Equity: 0% Stop-loss Price: 16.41
Member S&P 500? Yes Price 6-mo 12-mo
prob prob
Target 23.16 50% 39%
Investment Thesis Price Summary
Fundamental Valuation: Bearish
Analog’s technological innovation is one Using a discount rate of 9.89 percent,
of their main competitive advantages. the EBO valuation has an implied
This ability to technically innovative is price of $10.30.
being underestimated by investors.
Relative Valuation: Bearish
Analog’s integrated circuits are the Three of the five signs are bearish.
company’s main product. These The overall common theme is that
integrated circuits allow the company to Analog may be overvalued.
be high in accuracy, small in size, few
components which make its reliability Technical Analysis: Bearish
great. The integrated circuits have a Technical analysis indicates that
long life span and usually last over a Analog is overvalued but is probably
decade. The market has underreacted to due to negative market conditions.
Analog’s staying power.
Earnings Analysis: Neutral
Markets have underreacted to Analog’s Analog has had positive earning
news of cutting production and laying off surprises in three of the last five
employees. The stock price has not quarters. There are mixed upward
taken a huge hit because of this news and downward analyst revisions.
and actually reacted positively because
of the costs it will save. Analyst Recommendations:
Neutral/Bullish
Analog has been a key player in the Analog has a mean ratio of 2.22
transition from electromechanical which is slightly outperform but this
meters to electric ones. Consumers are level has risen steadily over the last
very green conscious right now and three months.
saving money and using resources more 1
effectively is a major advantage. The Institutional Ownership: Bullish
markets have underreacted to Analog’s Institutional ownership has risen by
electromechanical energy meters. 0.65% however, there are sellers
Company Summary
Analog Devices Inc. hereby known as Analog engages in the design, manufacture,
and marketing of analog, mixed-signal and digital signal processing integrated
circuits used in industrial, communication, computer, and consumer applications. Its
products are used in communications applications that include wireless handsets,
products used for high-speed access to the internet, consumer electronics, such as
digital cameras, camcorders, plasma TV’s, video game applications and surround
sound systems.1 Analog is one of the longest standing semiconductor companies in
the world. Analog’s digital integrated circuits translate real-world phenomena such
as pressure, temperature, and sound into digital signals. Analog’s thousands of chip
designs are used in industrial applications, medical and scientific instrumentation,
communications equipment, computers, and consumer electronics equipment.
Analog’s chips go into high-tech goods from such companies as Alcatel-Lucent, Dell,
Ericsson, Philips, Siemens, and Sony. Customer’s outside the U.S. account for more
than three-quarters of Analog’s sales.2

Category Revenue % of Total Product

Revenue
Industrial 1,274,924 49%
Communications 637,277 25%
Consumer 544,274 21%
Computer 126,456 6%
Total Product Revenue 2,582,931 100%

Region 2008 2007 2006

United States 20% 23% 24%
Rest of North and 4% 3% 4%
South America
Europe 26% 24% 24%
Japan 19% 21% 21%
China 16% 13% 11%
Rest of Asia 15% 16% 16%

Competition and Strategy

Analog competes with a number of semiconductor companies in markets that are
highly competitive. Analog’s competitors include Broadcom Corporation, Cirrus
Logic, Freescale Semiconductor, Linear Technology, Maxim Integrated Products,
Microchip Technologies, NXP Semiconductor, ST Microelectronics, Silicon
Laboratories, and Texas Instruments.3 Analog’s competitive performance in the
marketplace for real-world signal processing components depend upon several
factors, including design and quality of products, product performance, features and
functionality, product pricing, and availability and capacity. Analog’s technical
innovation emphasizing product performance and reliability, strong customer

1
http://finance.yahoo.com/q/pr?s=ADI
2
http://www.hoovers.com/analog-devices/--ID__10112--/free-co-profile.xhtml
3
http://library.corporate-ir.net/library/95/954/95455/items/322718/9FFDD7A7-1337-4687-94DB-
75E349832D68_ADI_2008_AR.pdf

2
service, and technical support allows Analog to compete against both foreign and
domestic semiconductor manufacturers.4

Analog’s integrated circuits technology has been the foundation of their business for
over four decades and they are one of the world’s largest suppliers of high-
performance analog integrated circuits. Analog’s integrated circuits are high
performing devices. The principal advantage these products have over competitors
is the higher accuracy, lower cost per function, smaller size, lower power
consumption and fewer components resulting in improved reliability. Each
integrated circuit can have as many as several hundred clients. These integrated
circuits generally have a very long lifetime which reduces Analog’s risk in the
marketplace. Over the past several years Analog has been expanding their
integrated circuit offerings along the entire signal chain into areas such as micro-
electromechanical systems, or MEMS radio frequency integrated circuits, and power
management.5

Analog recently reported their smallest quarterly profit in more than six years.
Shrinking demand in the chips used in phone systems and industrial machines is
forcing to shut down production and cut jobs to prevent a build up of inventory. To
cut costs the company will run its plants at 40% of their capacity in the current
period, down more than 10 percentage points from the previous year. The
slowdown has Analog thinking that sales would drop 25 to 35% over the next three
months.6

Analog has been a key player in the transition from electromechanical meters to
electric ones. Smart metering is becoming of increasing concern to consumers and
utility companies. By integrating advanced metering infrastructure utility companies
can give consumers instant access to their power usage and provide them data
about the price differences in the power they are using. This will allow consumers to
use their washing machines or running major appliances during peak hours and
waiting for non peak hours. Not only will this help the consumer by saving them
money it will also help the utility companies since they can effectively distribute the
power consumption more efficiently and save from building new unnecessary power
plants. 7

Historical Revenue and Earnings:

Historical Revenue Historical Earnings

FY 10/09 FY 10/08 FY 10/07 FY 10/09 FY 10/08 FY 10/07
1st 476.6 613.9 626.3 $0.09 $1.24 $0.45
Quarter

4
http://library.corporate-ir.net/library/95/954/95455/items/322718/9FFDD7A7-1337-4687-94DB-
75E349832D68_ADI_2008_AR.pdf
5
http://library.corporate-ir.net/library/95/954/95455/items/322718/9FFDD7A7-1337-4687-94DB-
75E349832D68_ADI_2008_AR.pdf
6
http://www.bloomberg.com/apps/news?pid=20601103&sid=a66zJzp0EyY4&refer=us
7
http://www.analog.com/library/analogDialogue/archives/43-01/smart_metering.html

3
2nd NA 649.3 597.5 NA $0.46 $0.38
Quarter
3rd NA 659.0 617.4 NA $0.48 $0.38
Quarter
4th NA 660.7 623.5 NA $0.49 $0.32
Quarter
Total 476.6 2,582.9 2,464.7 $0.09 $2.67 $1.53

Analog has shown increasing growth prior to the first quarter of 2009. Analog
seemed to be doing quite well before this. This decrease in profits is probably
because of the worldwide recession which has caused manufacturers to slow down
their production and quit order chips from Analog.

4
I. Fundamental Valuation
Analog Devices PARAMETERS FY1 FY2 Ltg
EPS Forecasts 0.55 0.82 14.40% Model 1: 12-year forecasting horizon (T=12).
Book value/share (last fye) 8.31 and a 7-year growth period.
Discount Rate 9.89%
Dividend Payout Ratio 53.00%
Next Fsc Year end 2009
Current Fsc Mth (1 to 12) 4
Target ROE (industry avg.) 10.95%

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Long-term EPS Growth Rate (Ltg) 0.1440 0.1440 0.1440 0.1440 0.1440
Forecasted EPS 0.55 0.82 0.94 1.07 1.23 1.40 1.61
Beg. of year BV/Shr 8.310 8.569 8.954 9.395 9.899 10.476 11.136
Implied ROE 0.096 0.105 0.114 0.124 0.134 0.144

ROE (Beg. ROE, from EPS forecasts) 0.066 0.096 0.105 0.114 0.124 0.134 0.144 0.137 0.130 0.123 0.116 0.110
Abnormal ROE (ROE-r) -0.033 -0.003 0.006 0.015 0.025 0.035 0.045 0.038 0.031 0.024 0.018 0.011
growth rate for B (1-k)*(ROEt-1) 0.000 0.031 0.045 0.049 0.054 0.058 0.063 0.068 0.065 0.061 0.058 0.055
Compounded growth 1.000 1.031 1.077 1.131 1.191 1.261 1.340 1.431 1.523 1.617 1.710 1.804
growth*AROE -0.033 -0.003 0.006 0.017 0.030 0.044 0.061 0.055 0.048 0.040 0.030 0.019
required rate (r) 0.099 0.099 0.099 0.099 0.099 0.099 0.099 0.099 0.099 0.099 0.099 0.099 0.099
discount rate 1.099 1.208 1.327 1.458 1.603 1.761 1.935 2.127 2.337 2.568 2.822 3.101
div. payout rate (k) 0.530
Add to P/B PV(growth*AROE) -0.03 0.00 0.00 0.01 0.02 0.03 0.03 0.03 0.02 0.02 0.01 0.01
Cum P/B 0.97 0.97 0.97 0.98 1.00 1.03 1.06 1.09 1.11 1.12 1.13 1.14
Add: Perpetuity
beyond current yr (Assume this yr's AROE forever) -0.30 -0.03 0.05 0.12 0.19 0.25 0.32 0.26 0.21 0.16 0.11 0.06
Total P/B (P/B if we stop est. this period) 0.67 0.94 1.02 1.10 1.19 1.28 1.38 1.35 1.31 1.28 1.24 1.20
Implied price 5.74 8.07 8.76 9.48 10.23 11.01 11.82 11.56 11.27 10.96 10.64 10.30

Check:
Beg. BV/Shr 8.31 8.57 8.95 9.39 9.90 10.48 11.14 11.89 12.66 13.43 14.21 14.99
Implied EPS 0.55 0.82 0.94 1.07 1.23 1.40 1.61 1.63 1.65 1.66 1.66 1.64
Implied EPS growth 0.491 0.144 0.144 0.144 0.144 0.144 0.016 0.011 0.005 -0.002 -0.008

Inputs:

1. EPS Forecasts and long-term growth rate were both from

http://www.reuters.com/finance/stocks/incomeStatement?symbol=ADI.N.

2. Book value per share derived from total equity of $2,402.1 million divided by
the total common shares outstanding 291.23 million giving a book value of
$8.31 as of last fiscal year end.
3. Discount rate was found using the CAPM model. I used a risk free rate of
3.91, a beta of .1.07, and a expected market return of 9.5% which yielded
r=.0391+1.07(.095-.0391)=.098913.
4. Dividend payout ratio was 53% according to
http://www.reuters.com/finance/stocks/ratios?symbol=ADI.N.

5. Next fiscal year-end is October 31, 2009 from

http://www.smartbrief.com/news/cea/companyData.jsp?companyId=55.

6. Current fiscal month is 4.

7. Target ROE= 10.95% according to the five year Semiconductor- Broad Line
industry average.

Output and Sensitivity Analysis:

1. Based on these parameters, a 12 year forecasting horizon and a 7 year
growth period, the EBO valuation is $10.30.
2. Changing the discount rate to 6.12% yields the current price of $19.40.
3. Changing the growth rate to 44.80% from 14.40% yields the current price of
$19.40.

5
4. Changing the industry ROE to 23.30% from 10.95% yields the current price of
$19.40.

6
II. Relative Valuation
Comparables
Mean FY2
Earnings Estimate Forward Mean LT PEG P/ B ROE Value
Ticker Name Mkt Cap Current Price (next fiscal year) P/ E Growth Rate (MRQ) 5yr ave Ratio P/ S
1 STM STMICROELECTRONICS 4.21B 4.82 -0.50 -9.64 12.00% -0.80 0.52 0.86% 0.60 0.43
2 IFX INFINEON TECHNOLOGIES AG 562.31M 0.75 -1.13 -0.66 8.00% -0.08 0.25 -2.63% -0.10 0.11
3 TXN TEXAS INSTRUMENTS INC. 19.219B 14.96 0.29 51.59 14.25% 3.62 2.06 19.43% 0.11 1.54
4 QCOM QUALCOMM INC. 56.2B 34.07 1.63 20.90 15.50% 1.35 3.28 20.39% 0.16 5.01

ADI ANALOG DEVICES INC. 5.62B 19.30 0.51 37.84 14.40% 2.63 2.34 15.47% 0.15 2.30

Implied Price based on: P/ E PEG P/ B Value P/ S

1 STM STMICROELECTRONICS ($4.92) -$5.90 $4.29 $77.15 $3.61
2 IFX INFINEON TECHNOLOGIES AG ($0.34) -$0.61 $2.06 -$12.13 $0.92
3 TXN TEXAS INSTRUMENTS INC. $26.31 $26.59 $16.99 $13.53 $12.92
4 QCOM QUALCOMM INC. $10.66 $9.90 $27.05 $20.53 $42.04

High $26.31 $26.59 $27.05 $77.15 $42.04

Low -$4.92 -$5.90 $2.06 -$12.13 $0.92
Median $5.16 $4.65 $10.64 $17.03 $8.27

Indicator Interpretation
P/E Bearish- Analog’s price is 37 times its earnings which is higher than
every competitor besides Texas Instruments. Analog may be
higher growth, lower risk with a smaller rate of return, or
overvalued.
PEG (P/E/G) Bearish- Analog’s PEG ratio is 2.63 which suggest that it is
potentially overvalued. Analog’s high PEG ratio could mean it is
lower risk or expensive. Also suggests high P/E driven by higher
expected growth.
P/B Neutral- Analog’s P/B is the second highest among its competitors.
A high P/B could mean low risk or small, high ROE, or overvalued.
Value Neutral- Analog’s value ratio is in the middle of its competitors but
(P/B/ROE) close to the lower end. This could mean that it is undervalued or
riskier.
P/S Bearish- Analog has the second highest price to sales value which
can mean it has lower risk, a higher profit margin, or is overvalued.
Summary Bearish- Three of the five signs are bearish and Analog’s price to
earnings is much higher than its competitors. The common theme
is that Analog may be overvalued.

7
III. Technical Analysis

Chart 1: Bollinger Bands

Slow Stochastics

Chart 2: Exponential Moving Average (EMA)

MACD

Chart 3: Linear Regression

8
 Momentum

Indicator Interpretation
Bollinger Neutral- Thin bands explain the lack of volatility in the market
Bands lately. Price is not near either the upper or lower band which is
neutral.
Stochastics Bearish- Percent K line is below percent D line and the gap appears
to be increasing. Percent K is less than 80 percent which is also a
bearish indicator.
Moving Bullish/Neutral- Moving Averages have been increasing slightly.
Averages However, the direction is fairly flat right now. The price is below
the 25 day MA and the 50 day MA. The gap between the 25 day MA
and 50 day MA is contracting.
MACD Neutral- The MACD is slightly above zero which is bullish. However,
it seems to be sloping negative. The MACD and the signal line are
about even which is a neutral sign.
Regression Bearish- The slope of the regression line is negative which is
bearish. The current price is above the regression line which is
bearish.
Momentum Bearish- Momentum price rate of change is under 100 which
indicates a drop in price compared to 100 days ago which is
bearish. The decreasing slope also indicates a bearish sign.

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IV. Earnings Analysis
Earnings Surprises
01/09 10/08 07/08 04/08 01/08
(Last qtr) (2 qtrs (3 qtrs (4 qtrs (5 qtrs prior)
prior) prior) prior)
Estimate .16 .43 .45 .41 .40
Actual .18 .49 .44 .44 .40
Difference .02 .06 .01 .03 0
Mean Earnings Estimates
04/09 07/09 10/09 10/10 LT Growth
Rate
Earnings .09 .11 .51 .81 14.40%
# Estimates 17 16 16 17 5
Earnings Per Share Estimates Revisions Summary
Last Week Last 4 Weeks
Revised Up Revised Revised Up Revised
Down Down
Quarter ending 04/09 6 7 2 13
Quarter ending 07/09 2 9 0 13
Year ending 10/09 7 9 4 14
Year ending 10/10 6 5 2 12

Analog had positive earning surprises in three of the last five quarters and one
negative earning surprise. Earnings are expected to increase to $0.81 in 2010.
Analog is expected to have a mean long term growth rate of 14.40%. Many
analysts have revised up their earnings estimates from four weeks ago. . Analyst’s
earnings per share revisions are mixed over the last month with both upward
revisions and downward revisions for 2008 and 2009.

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V. Analysts’ Recommendations
Current 1 Month Ago 2 Months Ago 3 Months Ago
Buy 6 7 8 10
Outperform 3 3 3 3
Hold 8 7 7 6
Underperform 1 1 0 0
Sell 0 0 0 0
No Opinion 1 1 0 1
Mean Rating 2.22 2.11 1.94 1.79

Analysts’ recommendations for Analog are bullish. Only one analyst expects the
company to underperform while the rest are mixed between buy outperform and
hold. Hold recommendations have increased over the last three months and the
mean rating has risen every month. These are neutral indicators because even
though a 2.22 is a slight outperform signal the mean rating has risen over the past
three months and looks to be getting worse.

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VI. Institutional Ownership

# of Holders % Beg. Holders Shares % Shares

Shares Outstanding 291,179,041 100.00%
# of Holders/ Tot Shares Held 544 98.91% 246,948,945 84.81%

# New Positions 48 8.73%

# Closed Positions 42 7.64%
# Increased Positions 190 34.55%
# Decreased Positions 194 35.27%
Beg. Total Inst. Positions 550 100.00% 245,066,506 84.16%

# Net Buyers/ 3 Mo. Net Chg -4 49.48% 1,882,439 0.65%

Institutional ownership is decreasing with more sellers than buyers however; there
are more new positions than closed positions. While there may be more sellers, the
number of shares actually being held has increased by 0.65%. While there may be
fewer institutions that own Analog, those that do own a greater percentage of it.

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VII. Piotroski Analysis

A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B):2.43 P/B ratio, 2nd
quintile growth_

B. Piotroski Score: ______8_

Piotroski Item Variable needed to compute Value Points

1. Positive net income TTM net income $440.5 million 1

2. Positive cash flow TTM cash flow $551.9 million 1

3. Earnings Quality 1

4. Decreasing Debt Debt/assets most recent ann 1.28 0

figure
Debt/assets previous ann 1.27
figure

5. Increasing working Current ratio most recent ann 3.67 1

capital figure
Current ratio previous ann 3.61
figure

6. Improving Asset turnover most recent 0.9 1

Productivity ann figure
Asset turnover previous ann 0.7
figure

7. Growing Profitability ROA most recent ann figure 25.94% 1

ROA previous ann figure 14.28%

8. Issuing Stock Shares outstanding most 297 1

recent ann
Shares outstanding previous 332
ann

9. Competitive Position Gross margin most recent ann 61.1% 1

Gross margin previous ann 59.7%

Total 8

Analog has a high Piotroski score of eight. Analog received points for having positive
net income, positive cash flows, cash flow greater than earnings, increasing working
capital, improving productivity, growing profitability, decrease in stock issuance,
and growing gross margin. An item of concern is the increasing debt but this is a
very minute number.

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