Analog Devices Faces Outlook Cuts but Holds Strong in Auto and Industrial, Analysts Optimistic

Oppenheimer analyst Rick Schafer reiterated an Outperform rating on Analog Devices, Inc ADI with a price target of $215.

The company reported mixed results Wednesday. The first-quarter print was in line, while the second-quarter sales and EPS outlook missed 11% and 19%, respectively. This “expected” cut is ADI’s fourth consecutive cut this correction, the analyst flagged. 

Hybrid manufacturing supports a normalized gross margin of ~75%. ADI’s product diversification and core position in auto/industrial remain intact, Schafer noted.

ADI trades 26x Schafer’s calendar year 2025 EPS vs. analog peer Texas Instruments Inc’s TXN 28x. Rolling correction dampens visibility and pace of recovery in the near term, but the analyst noted a better second half. 

Schafer noted that ADI’s margin/growth profile, FCF return, and proven execution support a multiple in line with TXN. He sees long-term growth led by auto/ industrial and remains a long-term buyer.

Bolton projects second-quarter revenue and EPS of $2.10 billion and $1.39 (prior $1.73).

Needham analyst N. Quinn Bolton maintained a Hold rating. The analyst noted that ADI posted a better-than-expected first-quarter result but guided second-quarter revenue ~$250 million below expectations on continued inventory digestion, especially in the industrial end market.

Despite bookings improving for the second consecutive quarter and inventory digestion starting to clear, Bolton expects the fiscal 2024 second-half recovery to be muted as sluggish demand and inventory correction in the automotive segment will likely drive automotive revenue lower half-over-half. 

Reflecting the muted revenue recovery, he now expects a more gradual recovery in adjusted gross margin, unlikely to return to 70% until the second half of fiscal 2025. Accordingly, his forward estimates come down meaningfully.

On his lower estimates, ADI is now trading at a 25x+ multiple of calendar year 2025 adjusted EPS. Bolton projects second-quarter revenue and EPS of $2.10 billion (prior $2.35 billion) and $1.26 (prior $1.53).

Morgan Stanley analyst Joe Moore reiterated an Overweight with a price target of $212, down from $219. Moore highlights that a historic downturn but supportive commentary and margin resilience keep him Overweight. 

ADI guided for a 16% sequential decline for the April quarter and a 35% peak-to-trough decline, but amid historic revenue declines at other broad-based peers, the analyst found more reasons to be encouraged. First, on inventory management, he noted that the company has reduced inventory for the third consecutive quarter (approx. $150 million) and has reduced channel inventory by $100 million over the past quarter with outlook for another $100 million in the April quarter. 

Second, on margin resilience, Moore points out that having continuously reduced inventory, the company sees little reason to reduce utilization further. 

Regarding peer TXN, which has seen a 1,400bp decline in peak to trough gross margin, Moore highlights that ADI will likely manage around a 700bp decline for gross margin and 1,400bp for operating margin. 

Third, on its forward outlook, Moore notes that ADI shared numerous reasons to be confident of a bottom in the April quarter at its October quarter earnings. While the trough is deeper than initial expectation, commentary continues to be encouraging. 

The analyst points out that the company commented that bookings are improving everywhere, across all segments, and that inventory-related headwinds will largely subside during this current quarter. 

The latter point will be interesting for Moore to monitor throughout the fiscal second quarter. The analyst revised his target multiple from 23x to 24x as he looked toward revenue recovery in the year’s second half.

Price Action: ADI shares traded lower by 0.57% at $192.62 on the last check Thursday.

Photo via Wikimedia Commons