Analog Devices Stock Appears To Be Significantly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Analog Devices (NAS:ADI, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $157.11 per share and the market cap of $58 billion, Analog Devices stock appears to be significantly overvalued. GF Value for Analog Devices is shown in the chart below.


Analog Devices Stock Appears To Be Significantly Overvalued
Analog Devices Stock Appears To Be Significantly Overvalued

Because Analog Devices is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.2% over the past three years and is estimated to grow 4.54% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Analog Devices has a cash-to-debt ratio of 0.20, which ranks in the bottom 10% of the companies in Semiconductors industry. Based on this, GuruFocus ranks Analog Devices's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Analog Devices over the past years:

Analog Devices Stock Appears To Be Significantly Overvalued
Analog Devices Stock Appears To Be Significantly Overvalued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Analog Devices has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $5.9 billion and earnings of $3.77 a share. Its operating margin is 29.54%, which ranks better than 93% of the companies in Semiconductors industry. Overall, GuruFocus ranks the profitability of Analog Devices at 8 out of 10, which indicates strong profitability. This is the revenue and net income of Analog Devices over the past years:

Analog Devices Stock Appears To Be Significantly Overvalued
Analog Devices Stock Appears To Be Significantly Overvalued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Analog Devices is 0.2%, which ranks in the middle range of the companies in Semiconductors industry. The 3-year average EBITDA growth is 7.2%, which ranks in the middle range of the companies in Semiconductors industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Analog Devices's return on invested capital is 8.13, and its cost of capital is 8.96. The historical ROIC vs WACC comparison of Analog Devices is shown below:

Analog Devices Stock Appears To Be Significantly Overvalued
Analog Devices Stock Appears To Be Significantly Overvalued

In conclusion, the stock of Analog Devices (NAS:ADI, 30-year Financials)appears to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Semiconductors industry. To learn more about Analog Devices stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.

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