TXN Texas Instruments Incorporated

Analog Devices, Inc. (ADI) is scheduled to announce its fiscal first-quarter 2012 results on February 22, 2012. We witness limited movements in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

Analog’s fourth quarter 2011 pro forma earnings missed the Zacks Consensus Estimate by 3 cents, or 4.8% due to weaker-than-expected revenue and margins, which in turn impacted earnings.

Revenue in the quarter was $716.1 million, down 5.5% sequentially and 7.0% year over year, particularly due to the weakness in the communications and industrial end markets. However, the consumer segment performed well in the quarter on account of seasonal increase in demand for digital cameras, gaming systems and the like. Automotive was also up 11.2% sequentially.

Gross margin of 64.3% was down both sequentially and year over year, impacted by an unfavorable mix and lower utilization rates, as Analog cut production to lower both internal and distributor inventories.

First Quarter Guidance

Analog expects first quarter revenue to decline 5–10% sequentially with the gross margin being 63% (+/- 50 bps), operating expenses of $226–229 million and diluted EPS of 44–51 cents. The Zacks Consensus Estimate was 59 cents when the company reported earnings, well over the guided range.

(Detailed earnings results can be viewed in the blog titled: Analog Devices Misses Again

Agreement of Analysts

Out of the 19 analysts providing estimates for the first quarter, one made an upward revision in the last 30 days, while for fiscal 2012, one analyst made a downward revision over the same time period.

The majority of analysts expect a decent first quarter with revenue and non-GAAP EPS (including options) in line with the Street consensus estimates of $662 million and $0.48, respectively. Additionally, they anticipate gross margins in line with management guidance of 63.0% (+/- 50 basis points).

The analysts expect to see strength in the automotive end market and stabilization in industrial and communications, which have remained weak thus far, driven by 3G deployments in China. They also contend that increasing semiconductor content in automobiles will drive the company’s revenue growth.

They also believe that order trends in the analog segment are improving and channel inventory is at a record low level. Hence, they expect to see strong recovery in the second half of 2012 driven by improved demand and inventory restocking.

However, a handful of analysts do not expect a strong quarter due to a certain amount of softness in the industrial and communications business and uncertainty in the current environment.

Magnitude of Estimate Revisions

In the past 30 days, there was no change to the Zacks Consensus Estimate for the first quarter and fiscal 2012.

Over the 90-day period, the Zacks Consensus Estimate fell 11 cents to 48 cents for the first quarter and 37 cents to $2.28 for fiscal 2012.

The significant decline in the Zacks Consensus Estimate over the 90-day period was in response to management’s comments during the fourth quarter earnings call, following which a majority of analysts had lowered estimates.

Our Recommendation

Analog Devices is a leading supplier of analog and DSP integrated circuits. We remain encouraged by the company’s dominant position in many of its product segments, and meaningfully improved gross and operating margin structures.

However, we remain concerned about the tough macroeconomic environment and softness within the communications and industrial infrastructure markets. With customers continuing to cut inventories and typical first quarter seasonality, we do not expect Analog Devices to see a strong first quarter. Also, given that the company expects lower sales during Christmas and the lunar New Year, it will effectively have 14 weeks of expenses versus 13 weeks of revenue in the upcoming quarter.

Analog, which competes with other large analog players, such as Intersil Corporation, Linear Technology Corp (LLTC), Maxim Integrated Products (MXIM) and Texas Instruments (TXN), holds a Zacks #4 Rank that translates into a short-term ‘Sell’ rating.

 
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