Analog Devices, Inc.
(ADI) NYSEJoe Eirkson, Katie Lally, Matt Lochansky
The Nittany Lion Fund, LLC.
Penn State Investment Association
Information Technology Sector
Team Recommendation: Bench
Introduction
Description
Key Drivers Valuation Conclusio
n
• Industrial Segment Growth1
• Mobile Infrastructure Exposure2
• Best-in-Class—Data Converters3
• 12 Month Price Target:
$50.66
• Appropriate Purchase Price:
<$42.00
Top Three Reasons to Bench:
3
Company Description
Introduction
Description
Key Drivers Valuation Conclusio
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Analog Devices, Inc. is a world leader in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing integrated circuits (ICs) used in virtually all types of electronic equipment
New organizational structure in 2009 introduced two focus groups: Core Products and Technologies (CPT):
product focused Strategic Market Segments (SMS): end
market focused Operates in 18 countries60,000
customers Headquartered in Norwood,
Massachusetts Employs approximately 8,300 people Operational business segments include:
Industrial, Communication, Consumer, Automotive and Computer
CEO Jerald Fishman
Revenue Breakdown
Introduction
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Key Drivers Valuation Conclusio
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United States19%
North/ South
America6%
Europe 25%Japan
16%
China18%
Rest of Asia16%
Geographic
Industrial46%
Automotive12%
Consumer19%
Com-munic-ations22%
Computer2%
Business Segment
Industrial Segment Growth
Introduction
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Key Drivers Valuation Conclusio
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Expected 8-12% growth over 5 years
Shift in motor control technology increased demand for signal processing
Demand driven by customers’ needs for increased: Energy efficiency Industrial automation Advanced instrumentation
Significant growth opportunities in Asian markets—particularly China
Expected 10-14% growth over 5 years
Increased demand for imaging and patient monitoring ADI is a market leader Strategic partners optimistic
about 2011 spending Healthcare trends to increase
demand: Increased need for highest
speed and channel count in medical imagining systems
Demand for improved measurementincrease diagnostic accuracy
Expansion of telemedicine; portability
Greater need for secure communications capabilities
Industrial and Instrumentation Healthcare
Mobile Infrastructure Exposure Appetite for data/video continues to
accelerate the need for more advanced based systems, 4G or LTEplays directly to ADI’s signal processing strengths 60% of ADI’s Communication segment comes
from communication infrastructure and wireless Virtually every wireless call, text, picture or
download today passes through an ADI IC Drivers of growth:
Need for higher performance radios Higher density of channels to support increased
data Improved power efficiency Smaller footprint Lower cost per channel
Short-term and long-term benefitsupgrades to 3G and 4G now and will continue in the futureIntroducti
onDescriptio
nKey
Drivers Valuation Conclusion
Mo
re rollo
uts
/up
grad
es
Best-in-Class—Data Converters Market leader in data converter
technology (46% market share--exposed to literally every region)
In 2010, accounted for 47% of sales (29% increase from 2009)
Data converter market expected to increase 9% every year through 2015
Demand for ADI converter technology driven by: Proliferation of digital systems Increasing number of channels of signal
processing in new, emerging applications
Data converters determine the overall performance of a systemADI offers high-performance, best-in-class solutions
Continuously improving architecture and process technologies to meet customers’ needs
Introduction
Description
Key Drivers Valuation Conclusio
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ADI Data Converters
Power Solutions
MEMs
Amplifiers
Radio Frequency
Customer Design Process:Begins with ADI data converters incorporates other components of ADI product portfolio
Company Risk Dependence on third-party subcontractors:
Relies on subcontractors and third-party wafer fabricators
Generates 50% of its revenue from products at third-party wafer-fabrication facilities
Risks: reduced control over availability, capacity utilization, delivery schedules, manufacturing yields and quality and assurance costs
Lack of long-term sales contracts: Demand may be volatile in certain end-markers (Long-term contracts are unusual for Semi companies
due to constant technological change and upgrades) Intense competition:
Technological Pricing
Fluctuations in foreign currency: Very sensitivederives 80% of revenue from
international marketsIntroduction
Description
Key Drivers Valuation Conclusio
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Sector Risk
Introduction
Description
Key Drivers Valuation Conclusio
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Industry is highly cyclical—vulnerable to economic downturns Most semiconductor companies carry risk due to increasing R&D
expenses in the industry Higher inventory levels, lower utilization rates and softer orders
pose risks to industry’s profitability Increased consolidation across industryeconomies of scale
10Introduction
Description
Key Drivers Valuation Conclusio
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ONNN’s Back-Up Plan The general Semi market is expected to grow 5-9% this year Play to reduce exposure to the Auto Industry
Negative outlook for Autos for the next 1-2 years Auto market accounts for only 13% of ADI’s revenues v. 22% of
ONNN’s revenues Diversify geographic exposureless reliance on one region (like
ONNN and Japan)
Sector Strategy
Current Allocation Proposed Allocation
ORCL12%
FISV15%
APH14%
GOOG17%
IBM20%
EMC15%
MRVL9%
ORCL12%
FISV15%
APH14%
GOOG17%
IBM20%
EMC15%
ADI9%
Comparable Analysis
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Key Drivers Valuation Conclusio
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12
Ratio Analysis
Introduction
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Key Drivers Valuation Conclusio
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Five Year Summary
13Introduction
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Growth Analysis & CAGRs
14Introduction
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Key Drivers Valuation Conclusio
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(10.0%)
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Growth Analysis
Series1Series2Series3Series4Series5
Time as of 2006
Gro
wth
or
% o
f S
ale
s
Projections
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Discounted Cash Flow
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17
One Year Stock Chart
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18
Debt Distribution
Introduction
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Key Drivers Valuation Conclusio
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Team Recommendation: Bench
Introduction
Description
Key Drivers Valuation Conclusio
n
• Industrial Segment Growth1
• Mobile Infrastructure Exposure2
• Best-in-Class—Data Converters3
• 12 Month Price Target:
$50.66
• Appropriate Purchase Price:
<$42.00
Top Three Reasons to Bench:
Questions or Comments?