ModernGraham Valuation: Analog Devices, Inc. (ADI)

moneyCompany Profile (obtained from Google Finance): Analog Devices, Inc. (Analog Devices) is engaged in the design, manufacture and marketing of a range of analog, mixed-signal and digital signal processing integrated circuits (ICs). The Company produces a range of products, including data converters, amplifiers and linear products, radio frequency (RF) ICs, power management products, sensors based on micro-electro mechanical systems (MEMS) technology and other sensors, and processing products, including DSP and other processors, which are designed to meet the needs of a base of customers. The Company’s products are embedded inside many different types of electronic equipment, including industrial process control systems; instrumentation and measurement systems; wireless infrastructure equipment, and aerospace and defense electronics. In November 2013, Analog Devices, Inc completed the sale of the assets of its microphone product line to InvenSense, Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $62.67
MG Opinion Fairly Valued
Value Based on 3% Growth $32.00
Value Based on 0% Growth $18.76
Market Implied Growth Rate 6.78%
Net Current Asset Value (NCAV) $12.31
PEmg 22.06
Current Ratio 9.59
PB Ratio 3.19

Balance Sheet – 10/31/2013 

Current Assets $5,472,400,000
Current Liabilities $570,500,000
Total Debt $872,200,000
Total Assets $6,381,800,000
Intangible Assets $312,700,000
Total Liabilities $1,642,200,000
Outstanding Shares 311,050,000

Earnings Per Share

2013 $2.14
2012 $2.13
2011 $2.79
2010 $2.33
2009 $0.85
2008 $1.77
2007 $1.51
2006 $1.48
2005 $1.08
2004 $1.45
2003 $0.78
2002 $0.28

Earnings Per Share – Modern Graham 

2013 $2.21
2012 $2.15
2011 $2.06
2010 $1.66
2009 $1.33
2008 $1.53


Analog Devices, Inc. is a solid company for the Enterprising Investor, having passed all five of the requirements.  The company does not qualify for the Defensive Investor because it currently trades at high PEmg and PB ratios, but Defensive Investors should keep the company on the watch list to see if those ratios improve sufficiently.  From a valuation perspective, the company has achieved a moderate level of growth, with EPSmg (normalized earnings) going from $1.53 in 2008 to $2.21 in 2013.  This is not a substantially high level of growth, but it does support the market’s implied estimate of 6.78%.  As a result, the company appears to be fairly valued at this time, and Enterprising Investors should feel comfortable proceeding with further research to determine whether the company is fit for their individual portfolios.

What do you think?  Do you agree that Analog Devices, Inc. is fairly valued?  Is the company suitable only for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Analog Devices, Inc. at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill





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