Analog Devices

(ADI) - Get Report

enjoyed a nice pop Wednesday, one day after it

reported earnings.

The company's shares were rising 7%, or $1.99, to $29.99 in afternoon trading. Investors warmed to the company's comments on recent order momentum, amid sentiment that the company may be able to top its cautious guidance for the quarter under way.

On Tuesday night, Analog posted a profit of 9 cents a share in the fourth quarter on sales of $456 million. A year earlier, the firm earned 6 cents a share on sales of $423 million.

ADI said Tuesday that strong bookings in October carried over into November, adding that the trend suggests potential upside to its forecast of flat sequential growth. In another positive sign, gross margins rose 50 basis points to 54.5%, benefiting from modest sales growth and stable prices.

But Banc of America's Doug Lee voiced some concern about whether the trend can continue, suggesting in a note that the rise in margins may have been helped along by growth in inventory levels. His firm has no banking relations with ADI.

Inventory days at the chipmaker have risen for four consecutive quarters, jumping to 135 days in the October quarter from 126 days in the previous one. "We remain concerned that the eventual return to target inventory levels (100-110 days) may restrict future margin expansion," he wrote in a note out Wednesday morning.

Lee trimmed his fiscal year 2003 estimates to 77 cents a share from 80 cents.

Investec's Bobby Burleson likewise lowered estimates. But he said the move shouldn't be perceived as a negative. Instead, it merely keeps ADI's outlook in line with conservative guidance across the semiconductor industry, which has sought to keep expectations low for the holiday season.

In fact, at this point expectations may be too low, argued Burleson in a note. "We believe the strength seen by ADI in the months of October and November indicates that some seasonality is occurring. If this strength continues for the remainder of November and for the beginning of December, we believe several of our analog companies including ADI,

Fairchild Semiconductor

(FCS)

,

Linear Technology

(LLTC)

, and

Maxim

(MXIM) - Get Report

will beat their guidance."

One encouraging sign: ADI believes the outlook for its industrial business -- its biggest end market, accounting for some 40% of revenue -- is improving. In Burleson's note, he said, "We believe we may see sequential growth in the industrial business in the January quarter, albeit lagging behind other areas such as consumer and PCs."

Investec has a buy rating on ADI. It hasn't done banking for the company.