ADI stock silences the naive and extends the rally as the cycle recovers

Analog devices NASDAQ:ADI stock prices are rising because there is a bottom and the outlook is solid. Second quarter results and third quarter guidance are not solid, but they show that markets are stronger than expected and artificial intelligence is supporting a return to growth. Semiconductor end-market inventories are expected to normalize in the current quarter, leading to a cyclical recovery in the industry. Revenues and earnings are expected to grow sequentially in the third quarter, return to year-over-year growth in the fourth quarter and accelerate in 2025.

Analog stocks are soaring on better-than-expected results

Analog Devices struggled in the second quarter, but results were better than feared. The company reported net revenue of $2.16 billion, down 33.7% but topping the consensus estimate by 220 basis points. Weakness was evident across all end markets, led by a 45% decline in communications and a 44% decline in industrials. The industrial segment accounts for over 55% of the total, so standardization in this market is crucial for long-term growth. The Automotive segment, accounting for 22% of the net, decreased by 10%, while the Consumer segment decreased by 9% and represents 8% of the net.

Margin is another mixed message: gross and operating margin reduced by four-digit basis points due to deleveraging and inventory management. However, net results are better than feared, with adjusted EPS of $1.40, down 50% from last year. That was 13 cents ahead of the consensus, on top of revenue strength, and results are expected to improve in the third quarter.

The forecasts are favorable and constitute a continuation of the trend established in the second quarter. The company maintained revenue and EPS above consensus and may exceed forecast. The company claims that the number of new orders is growing, which is optimistic and a significant recovery is expected. Due in part to end-market normalization, the economic recovery is also supported by artificial intelligence and the shift to edge solutions, where Analog Devices is a leader in data creation and connectivity.

Analog devices are used to achieve shareholder success

Analog Devices uses some leverage in its business, but the amount is insignificant. Long-term debt is less than 0.2 times equity, and solid cash flow supports the strong balance sheet despite the business downturn. The most important balance sheets at the end of the second quarter include an increase in cash, current assets and total assets, offset by an increase in debt, which left equity at an unchanged level compared to the previous year. The conclusion is that dividends and share repurchases are credible and will continue into 2024.

The dividend yield is approximately 1.7%, the stock is trading close to 36 times earnings, a high valuation supported by growth prospects, dividend payout ratio and high CAGR in distribution. The company has been increasing distribution for twenty-two years and paying only 60% of this year’s profit projections. This figure falls to 48% compared to the 2025 forecast, suggesting continued aggressive double-digit growth and earnings growth expected to continue through 2026.

Share buybacks are significant. The company uses share-based remuneration, but more than balances it with own buyouts. Redemptions reduced average volume by 2% in the second quarter and should continue unabated.

ADI shares rise to new high, led by analysts

Analysts have pegged ADI shares to rise post-launch, kicking off new coverage and raising existing price targets days before the scheduled launch. The activity suggests that a move to the upper end of the expected range is likely. The high target of $254 is among the most recently set and represents an increase of another $20, or about 10%, on top of the post-launch price increase. Analysts are likely to continue the trend and revise the range upwards as the company has indicated a return to growth and expects growth to accelerate.

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