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Why Is Analog Devices (ADI) Up 14% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Analog Devices (ADI). Shares have added about 14% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Analog Devices due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Analog Devices Q2 Earnings & Revenues Beat Estimates

Analog Devices Inc. reported second-quarter fiscal 2019 adjusted earnings of $1.36 per share, beating the Zacks Consensus Estimate of $1.30. The bottom line decreased 9.3% year over year but increased 2.3% sequentially.

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Revenues of $1.53 billion topped the consensus mark of $1.51 billion. However, the top line declined 2% year over year and 0.94% from the fiscal first quarter.

This downside can be attributed to weak performance of the company in consumer and industrial end markets during the reported quarter. Moreover, macroeconomic headwinds negatively impacted the topline.

Nevertheless, Analog Devices’ solid momentum in the communications market remained a positive in the quarter under review. Its strengthening relationships with customers and expanding addressable market size are expected to continue aiding business growth.

Revenues by End Markets

Industrial: The company generated revenues of $763.5 million (accounting for 50% of the total revenues), which declined 6% year over year.

Communications: Revenues from this market came in at $359.6 million (24% of revenues), increasing 3% year over year. This can be primarily attributed to rising 5G deployments and upgradation in 4G technology.

Automotive: Revenues from this market came in at $249.8 million (16% of revenues), flat with the year-ago quarter.

Consumer: This market generated revenues of $153.7 million (10% of revenues), reflecting a 32% significant decline on a year-over-year basis.

Operating Details

Non-GAAP gross margin contracted 90 basis points (bps) on a year-over-year basis to 70.6%.

As a percentage of revenues, adjusted operating expenses were 29%,expanding 80 bps from the year-ago quarter.

Non-GAAP operating margin contracted 170 bps on a year-over-year basis to 41.5% during the reported quarter.

Balance Sheet & Cash Flow

At the end of the fiscal second quarter, cash and cash equivalents were $713.6 million, up from $605.9 million in the comparable year-ago period.

Long-term debt was approximately $5.61 billion, decreasing from $6.23 billion at fiscal first quarter-end.

Net cash provided by operations was $670.9 million, up from $371.8 million in the fiscal first quarter.

The company generated $596 million of free cash flow during the second quarter.

In addition, Analog Devices returned $302 million to its shareholders through dividends and share repurchases.

Guidance

For the third quarter of fiscal 2019, Analog Devices expects revenues to be $1.45 billion (+/- $50 million). 

Non-GAAP earnings are expected to be $1.22 (+/- $0.07) per share. 

The company anticipates non-GAAP operating margins to be approximately 40.5%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -11.68% due to these changes.

VGM Scores

At this time, Analog Devices has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Analog Devices has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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