Analog Devices Champs At Bit On Chip Demand For Cars

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A nalog Devices, among the world's most prominent producers of analog chips used in wireless network equipment, is poised to continue profiting from solid demand for increasingly advanced semiconductor content, including in cars and trucks, analysts say.

"Of all the various end markets thatAnalog Devices ( ADI ) sells into, we are most optimistic about automotive," Morningstar analyst Brian Colello said in an interview.

He says the global auto segment has been strong and should continue so because of increasing demand for electronic content that is used to bolster everything from entertainment systems to safety sensors in automobiles. He expects this to continue indefinitely, as consumers show they are willing to pay for more tech-driven conveniences in their cars and trucks and as governments in various parts of the world steadily mandate new safety standards.

"This is a secular trend, and ADI is growing nicely with that trend," Colello said.

Strong auto sales over the past year provided extra benefit. Autodata reported that U.S. sales of cars and light trucks climbed 5.9% in 2014 to more than 16.5 million, the best sales performance since 2006. "We think of that as icing on the cake," Colello said.

Analog-To-Digital Market

Analog Devices' chips are used to convert "real-world signals" such as readings of sound and temperature into digital signals, as Colello noted in a recent report to clients. In that report, he says Analog Devices has carved out a big presence in the lucrative analog chip realm -- it controls about half the market in data converter chips, for instance, according to Morningstar.

Because analog chips "are neither particularly expensive nor do they require cutting-edge manufacturing techniques, high-quality analog chip makers tend to be able to maintain healthy pricing yet generate strong profitability over time," Colello wrote.

The Norwood, Mass.-based company's established position in the industry, he says, also should help it sustain growth.

"Once electronics manufacturers select an analog chip, they tend to stick with the chip for the life of the device because it is costly to redesign a device in order to swap in a competing chip that might not necessarily be compatible with the rest of the product," Colello wrote.

Industries At Work

Colello told IBD that while demand for Analog Devices' chips is increasingly evident in autos, a need for the ever-advancing technology is abundant in myriad corners of the company's broader industrial and communications businesses -- from more sensors used in medical equipment to more accurately monitor heart rates, for example, to technology used to send data wirelessly from a meter at a residence back to a utility company, as opposed to that company sending someone out to physically check the meter.

Sales growth has actually been even stronger in these two categories, though the analyst looks for the auto contribution to continue to hold great potential.

For Analog Devices' fiscal 2014, which ended at the close of October, the company reported a profit of $2.39 per share, up 11% from a year earlier. Revenue totaled nearly $2.9 billion, up 9%.

The automotive business accounted for 18% of revenue and grew 9% from a year earlier, while the industrial segment accounted for 47% and grew 10%. The third prong of Analog Devices' operation, its communications business, accounted for 24% and grew 29%, as wireless carriers around the world continue building out 3G and 4G networks. Consumer, the fourth business niche, accounted for 11% of revenue, and that declined 20%.

For its first fiscal quarter of 2015, analysts on average expect the company to produce earnings of 61 cents per share, up from 49 cents a year earlier, on revenue of $760.6 million, which would mark a 21% increase, according to a Thomson Reuters poll of analysts. Analog Devices is scheduled to report Feb. 17.

For all of fiscal 2015, Wall Street projects earnings of $2.83 per share, a gain of 18%, on a revenue increase of 14%, to nearly $3.3 billion. Contributing to the gains this year will be Analog Devices' $2 billion acquisition of Hittite Microwave in July 2014. The acquisition gave Analog additional technical capabilities across its three main business groups.

A spokeswoman said executives could not comment for this article because the company had entered a quiet period ahead of reporting quarterly earnings this month. But Vincent Roche, Analog Devices' CEO, said at a conference in December that investors "can expect to see the revenue synergies" from the Hittite deal become significant toward the end of fiscal 2015.

"So around then I think with the pipeline of opportunity that we have, and the things that Hittite was working on, we'll start to see the revenue synergies starting ..." he said. "And I think 2016 is when we'll start to see a meaningful contribution in terms of the multiplication factor of Hittite with ADI."

Cars Becoming The IT Thing

On growth prospects in the auto arena, Roche spoke optimistically. He said that the number of sensors used in cars is expected to continue growing steadily for several years. "So there's a tremendous opportunity," he said. And of auto manufacturers, "they're all becoming IT companies in some way now."

Roche said that between the acquisition of Hittite and ongoing demand for chips, "we think we can grow this business at two to three times (U.S.) GDP, so that is somewhere in the region of 6% to 9% a year. ... Notwithstanding the cyclicality in our industry, but over time, I think we can achieve at least the midpoint of those growth projections and possibly on the higher end depending on how well the acquisition of Hittite actually plays out."

Colello said he views Roche's outlook as realistic, owing in large part to steady demand for more electronic content. "We think it is reasonable," Colello said. "The near-term picture is still very bright."

Though well-positioned, Analog Devices is hardly an island of prosperity in its industry. It competes on various fronts with several heavyweights, and so, analysts say, can't afford missteps with the integration of Hittite that might send future customers to existing rivals.

Chips And The Economy

Analog Devices ranks sixth largest, by market cap, among 43 firms in IBD's Electronic-Semiconductor Manufacturing group, which is dominated in size byIntel ( INTC ) andTaiwan Semiconductor ( TSM ). Also larger than Analog Devices areTexas Instruments ( TXN ),Micron Technology ( MU ) andQorvo (QRVO).

Also, analyst Doug Freedman of RBC Capital Markets told IBD, the semiconductor industry tends to be cyclical and major players often see their sales ebb and flow. He also noted that while economic growth appears to be gathering momentum in the U.S., growth is slowing in large pockets of Europe and Asia.

He also said that the semiconductor industry average growth rate is roughly in line with GDP, which would suggest that the growth expectations of Analog Devices' chief executive could prove aggressive.

Freedman calls Analog Devices a "strong" and "reliable" company and notes that its stock has had boom periods in recent years. Analog Devices stock rose 21% in 2013 and 9% in 2014, and is down about 1% this year. Shares ran up 36% from mid-October to mid-December and were last trading around 55.

Several companies with chips or other tech products for connected cars are highly rated by IBD at the moment, among themAmbarella (AMBA), IBD Leaderboard stockNXP Semiconductors (NXPI),Skyworks Solutions (SWKS),Harman International Industries (HAR) andNvidia (NVDA). Harman was featured in IBD's The New America on Feb. 5 and NXP Semiconductors on Jan. 28.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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