Analog Devices Stock Analysis – June 2015 Update $ADI

Analog_Devices_Logo.svgAnalog Devices (ADI) has seen a significant price rise in the last few months, greatly outpacing the market. Such a rise will intrigue some speculators and technical analysts who think that a price run up can be indicative of a good company. After all, far too often individuals believe that if a company rises in price, it will continue to rise. In addition, Analog Devicesbeat earnings forecasts in its most recent quarter, which according to CEO Vincent Roche is a result of “focusing on the right markets and products.”

However, Benjamin Graham, the father of value investing, taught that the most important aspect to consider is whether the company is trading at a discount relative to its intrinsic value. It is through a thorough fundamental analysis that the investor is able to make a determination about a potential investment’s merits.

The model is inspired by the teachings of Benjamin Graham and considers numerous metrics intended to help the investor reduce risk levels. The first part of the analysis is to determine whether the company is suitable for the very conservative Defensive Investor or the less conservative Enterprising Investor, who is willing to spend a greater amount of time conducting further research.

In addition, Graham strongly suggested that investors avoid speculation in order to remove the subjective elements of emotion. This is best achieved by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another. By using the ModernGraham method, one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.

ADI Chart

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Defensive Investor – Must pass at least 6 of the following 7 tests: Score = 4/7

  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 1/3rd over the last 10 years, using 3-year averages at the beginning and end of the period – FAIL
  6. Moderate PEmg (price over normalized earnings) 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

Key Data

Recent Price $67.03
MG Value $24.08
MG Opinion Overvalued
Value Based on 3% Growth $33.65
Value Based on 0% Growth $19.73
Market Implied Growth Rate 10.19%
Net Current Asset Value (NCAV) $6.19
PEmg 28.88
Current Ratio 3.79
PB Ratio 4.28

Balance Sheet – March 2015

Current Assets $4,046,000,000
Current Liabilities $1,068,000,000
Total Debt $498,000,000
Total Assets $7,048,000,000
Intangible Assets $2,265,000,000
Total Liabilities $2,084,000,000
Outstanding Shares 317,000,000

Earnings Per Share

2015 (estimated) $2.68
2014 $1.98
2013 $2.14
2012 $2.13
2011 $2.81
2010 $2.33
2009 $0.85
2008 $2.67
2007 $1.50
2006 $1.48
2005 $1.08

Earnings Per Share – ModernGraham

2015 (estimated) $2.32
2014 $2.19
2013 $2.21
2012 $2.22
2011 $2.18
2010 $1.84

Dividend History

ADI Dividend Chart

Competitive Comparison

Analog Devices is not very attractive when compared to some of its competitors. For example, a ModernGraham valuation of Seagate Technology(NASDAQ:STX) indicates that company is significantly undervalued and suitable for Enterprising Investors. Western Digital (NASDAQ:WDC) fares even better, and is both undervalued and suitable for the more conservative Defensive Investor in its most recent ModernGraham valuation.


Analog Devices passes the initial requirements of the Enterprising Investor but not the Defensive Investor. Specifically, the Defensive Investor is concerned by the insufficient earnings growth along with the high PEmg and PB ratios while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $2.18 in 2011 to only an estimated $2.32 for 2015. This level of demonstrated growth does not support the market’s implied estimate for annual earnings growth of 10.19% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged around 1.25% annually, so the market is expecting a significant bump in earnings growth. The ModernGraham valuation model uses a much more conservative figure when making an estimate, and returns an estimate of intrinsic value well below the current price, indicating that Analog Devices is overvalued at the present time.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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