Citi reiterates buy on Analog Devices even ‘worst downturn in at least a decade’ is here


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Investment firm Citi reiterated its buy rating on semiconductor company Analog Devices (NASDAQ:ADI) on Monday, reaffirming its belief that the stock should be “one of the best performers” during the downturn, believed to be the worst “in at least a decade.”

Analyst Christopher Danely, who also has a $195 price target on Analog Devices (ADI), noted that the downturn in the semiconductor industry will impact “every company and end market” noting it is already impacting Analog Devices. However, he added the company’s management has been honest about the downturn and the company is taking steps to prepare itself.

“ADI management has been honest about the downturn and has already talked about a slight increase in cancellations and ADI is taking several steps to prepare for the downturn, which should help insulate them,” Danely wrote in a note to clients, adding that management has gone over its backlog with a fine tooth comb and believes between 15% and 40% could be double ordering.

Analog Devices (ADI) rose fractionally in premarket trading.

Even if revenue were to decline 15%, Danely believes that Analog Devices (ADI) could keep its gross margins above 70%, as it has the highest margins among its peers and 55% of its revenue comes from industrial and data centers, widely believed to be the best sectors during the downturn.

It’s unlikely that Analog Devices (ADI) does any large-scaled M&A, despite its past, but there is the potential for some tuck-in acquisitions, the analyst pointed out.

And even though the broader semiconductor industry looks to be softening and lead times have normalized, Danely said that certain manufacturing nodes and roughly 5% of Analog Devices’ ​(ADI) business is still in short supply.

Last month, Analog Devices (ADI) priced $300M worth of bonds, with the net proceeds to be used for general corporate purposes.

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