We are going to initiate a 234 share position, or 3% portfolio
weight, in Linear Technology Corporation (LLTC:Nasdaq) in the
Trifecta Stocks portfolio.
The was recently trading at $48.30. We look to this name as
a consistent performer with a nice dividend yield that should
be a solid, though not stellar, performer.
Linear designs, manufactures and markets high-performance
analog integrated circuits. Analog chip manufactures have
designers with years of experience, which serves as a large
competitive barrier since the multitude of chip designers
focus on digital chips. The company sells into a diversified
customer base, with sales into the industrials end markets
representing 43% of revenue, automotive 19%, communications
20%, computers 9%, consumer 3%, military and space 6%. The
company is seeing strength in the industrials and automotive
sectors and we favor the stock for that exact reason.
Linear has gained market share in the industrials and
automotive space over the past three calendar years. We have
long stated our belief that the connected car theme is just in
its infancy and see Linear as another way to capitalize on
this trend. Analog chips are increasingly used in electric and
hybrid vehicles (including battery monitoring) and in
navigation and infotainment systems, among other automotive
Customers in those arenas are willing to pay for quality and
not evaluate suppliers simply on price. Linear provides high-
performance chips with low failure rates at nearly one part
per million, so that an automobile manufacturer does not have
to worry about a minor price difference per car and can
instead focus on its bigger issues. The industrials and
automotive markets have longer sales cycles, longer life
designs and higher profitability. International sales
represent about 73% of revenue, with the U.S representing
around 27% and Europe 19%.
Analog chips can help monitor real-world conditions, providing
sensors for temperature, pressure, weight, light, sound and
speed and offer power management solutions. Linear’s average
selling price is $1.88. The company’s leading gross margin
(75.4% last quarter) and operating margin (44.9%) are
indicative of the company’s strength (relative to its peer
average in the mid-60% range for gross margin and low-30%
range for operating margin.
Some bears knock the company, as it’s a modest grower.
Management deliberately avoids low-margin businesses (consumer
and mobile technologies). The flip side to avoiding the
business is that the company has lower growth rates, as it is
not designed into some of the fastest-selling consumers
The company has a robust balance sheet, having cleaned up its
debt, and now has $1.07 billion in cash, or $4.39 per share.
About 80% of the cash lies overseas and we believe management
could leverage the balance sheet and launch an accelerated
buyback plan. The company throws off ample cash flow ($148
million last quarter) and the stock currently sports a 2.475%
Management issued its March (fiscal third) quarter outlook
calling for 4-7% sequential growth, slightly better than
typical seasonality of 4% and ahead of expectations. We
believe the stock is worth $54 a share, using a 23x multiple
(a premium to its group multiple of about 18x due to the
company’s high margin profile and strong cash position) on
fiscal 2016 consensus earnings (June) of $2.32 a share.
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Linear Technology is one of those under-the-radar
semiconductor companies, not getting the same buzz as Intel
(INTC:Nasdaq), Texas Instruments (TXN:NYSE), Samsung or
Applied Materials (AMAT:Nasdaq). But it is one of the best-
performing names in the group and technically looks ready to
stay on a roll.
We see from the chart the defined channel, where it is near
the high end of the range, but we also see a nice cup-and-
handle continuation pattern and a move above $49 confirms the
move. Volume had been decent on the way up, but now it is
consolidating on lower turnover, which is what you like to see
at this moment.
The momentum indicators are all on buy signals and while we
would start a position here, we could add more at the bottom
end of the channel.
The region saw higher-than-expected production revenues and showed solid margin leverage.
Its capital allocation plan sent its shares up.
We've added a new position taken a gain in another amid markets bolstered by cheap oil.
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