Should You Buy It? ADI

The company reported a good quarter, but at its current levels, shareholders beware.
By David Peltier ,

Analog Devices

(ADI) - Get Report

fell about 4% Wednesday, closing at $33.35, even though the integrated circuit-maker posted better than expected earnings the night before.

The company earned 44 cents a share in the fiscal second quarter (ending April), which was three cents ahead of the consensus analyst estimate. Revenue grew 6% from the previous year to $649.3 million, and also came in $22.1 million ahead of expectations. Analog's fiscal third quarter (ending July) guidance for earnings of 43 cents to 45 cents a share on revenue of $650 million to $665 million was also higher than previous expectations.

This upside was driven by revenue from the company's two largest business segments -- industrial and communications -- which grew 10% and 20% year-over-year, respectively. Analog also benefits from a weak dollar, as it generates about 75% of its revenue overseas.

However, the company's order backlog was flat sequentially at the end of the quarter, leading some investors to question management's visibility. Analog also said that its gross margin could level off around 61% for the next couple of quarters because of seasonal business patterns, after gaining 4 percentage points over the past year.

Wave Goodbye to ADI

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With that in mind, I'm here to answer readers' questions: Should you buy it? Is Analog Devices

an attractive value

following this post-earnings decline, or should readers focus elsewhere?

After Wednesday's decline, the stock still sits 28% above its January lows. Analog shares are valued at 19.5 times expected full-year earnings of $1.72 a share. This is a premium to the 15% earnings growth targeted for fiscal 2008 (ending October), though a discount to the average 22.1 times earnings multiple of its peers.

It's also worth noting that Analog has a pristine balance sheet with $1.19 billion of cash ($4.10 per share) and equivalents and no debt. Management used these funds to buy back 5.8 million shares during the last quarter, and Analog has bought back nearly 30% of its total shares outstanding over the past 4 years.

Plus, on March 20, management boosted the company's quarterly dividend to 20 cents a share. Investors at the close of trading May 27 will qualify for the June 18 payment. Analog's 2.4% yield is toward the high end of the industry range and above the average dividend payout of the S&P 500 index.

But given the fact there are already 12 analyst buy ratings, compared with 9 holds and 1 sell, I believe Analog could see more downgrades like the one out of Pacific Crest Wednesday. Especially since the stock has already enjoyed a nice run and the company's order backlog has not been increasing and the gross margin is expected to level off.

With that in mind, readers should avoid shares of Analog Devices at current levels. But given the company's strong balance sheet and healthy dividend yield, I'd reconsider my stance if the stock traded below $28 in the coming months.

David Peltier is the manager of TheStreet.com Value Investor and writes regularly for TheStreet.com about stocks that are value plays or deliver high-yields, including Altria (MO) - Get Report, Citigroup (C) - Get Report and Pfizer (PFE) - Get Report.

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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