Market Commentary: 1 Stock That Landed Man On The Moon
Did you know that man would never have landed on the moon without a company that flies under the radar, called Analog Devices. Its data converters were used in the Apollo Lunar Lander, and today they play a role in everything from smartphones to autonomous vehicles.
Yet few people know much about ADI, so let’s dive in.
Key Points
- Analog Devices has a strong economic moat, fortified by its nearly 8,000 patents and a 50-year track record in high-performance analog technology.
- The company’s robust financial performance is reflected in its impressive gross margins, which stand at around 70%, well above the industry average.
- Analysts are bullish on the company, pegging its stock with a $199 price target.
High-Value Play in Semiconductors
Analog Devices doesn’t garner a whole lot of hype because it’s not as flashy as the Teslas and Apples of the world, but this semiconductor company has quietly been a high performer, offering a compelling argument for inclusion in most any investment portfolio.
To begin with, the company has a strong economic moat as a market leader in high-performance analog technology with a nearly 50-year track record. Its integrated circuits (ICs) are used in a broad range of applications, from aerospace and automotive to healthcare and consumer electronics.
That moat is broadened thanks to its almost 8,000+ patents that provide it with a sustainable competitive advantage, which is evident in the numbers. Specifically, ADI enjoys a gross margin of around 65%, which is well above the industry average.
Its strong pricing power and efficient operations drive enormous profitability; the company drops almost $1 billion to its profit-and-loss operating income line item quarterly.
To give you a sense of how extraordinary that is, the company’s revenue last quarter was $3.07 billion while its operating income was $953 million. Now compare that to Apple, which has perhaps the best business model around and you’ll see it eclipses even Buffett’s biggest equity holding on on key metric: operating income/revenues. Apple generated $22.7 billion of EBIT on $81.7 billion in revenues, a 27% ratio versus 31% for Analog Devices.
A Sound Investment
ADI’s revenue for the last fiscal year was $12.0 billion, a 64.2% increase over the year prior. It also has a 21-year streak of paying dividends with a current payout ratio of just 43% and a yield of 1.96%.
The company also enjoys a strong balance sheet with $1.4 billion in cash, though debt is creeping higher than we would like at $6.9 billion. The solid financials have analysts largely bullish too with a $199 price target, which aligns with our discounted cash flow forecast analysis target of $198 per share.
ADI also holds a unique edge over its competition due to its custom-designed chips that cater to high-margin, specialized applications. In comparison, competitors like Texas Instruments have a broader focus but lack the specialized edge that ADI brings to high-performance sectors like healthcare and aerospace.
Key Takeaway for Investors
Analog Devices provides a compelling case for investment with a strong economic moat in the form of market leadership and intellectual property. The company’s financials are impressive with margins and metrics that rival and even eclipse those of the best companies in the world.
To add to the tailwinds, management appears to be buying shares back aggressively. A couple of years ago, the company’s board of directors authorized the repurchase of an additional $8.5 billion of its common stock.
Combine the share repurchase scheme with consistently increasing earnings per share as well as bullish analysts forecasts and you end up with a compelling investment play.
