Analog Devices stock is a Buy for 2022, this investor says

Ringing in the new year as an investor means taking a retrospective at the trials and tribulations of the past 12 months but it’s also about looking ahead to how the market will play out in 2022. Will interest rate hikes do real damage to growth stocks? Are COVID, supply chain disruptions and inflation still going to be the defining factors two, three or four quarters from now? And how about the computer chip shortage and its ongoing impact on sectors like automotive? 

It doesn’t always take a crystal ball to see into the future, though, as some trends are clearly in the crosshairs. For instance, it seems a given that in 2022 the ongoing digital transformation will continue to rejig industries across the board, 5G networks will expand their rollouts and connected tech will be further integrated into our lives, particularly in the automobile sector where sensors, data analytics and entertainment features will become even more ubiquitous.

And though there are many tech companies working in these trends, portfolio manager David Driscoll likes Analog Devices (Analog Devices, Stock Quote, Charts, News, Analysts, Financials NASDAQ:ADI).

“Their future is all based on 5G telecommunications and driverless vehicles and all the computer chips that go into electronics in a vehicle,” said Driscoll, President and CEO at Liberty International Investment Management, speaking on BNN Bloomberg on Friday. 

“They’re focused on the future, they’re participating in that and they’ve made recent acquisitions to help to bolster their lineup. As a result, they’ve been able to grow their profitability at a much faster speed,” he said.

Some of that growth was on display in Analog’s most recent quarterly report where revenue and earnings were at all-time highs. The company’s fourth quarter fiscal 2021 topline was $2.340 billion, up 53 per cent year-over-year, while adjusted EPS was up 20 per cent to $1.73 per share. 

Analog, which makes integrated circuits for electronic equipment, saw growth across all of its end markets. The company had 45 per cent year-over-year revenue growth in its largest segment, Industrial business, which covers areas like automated test equipment, measurement and scientific instruments along with factory automation and connectivity. There revenue hit $1.178 billion for the quarter and $4.011 billion for the fiscal year.

Analog’s Automotive segment saw a Q4 97 per cent year-over-year increase to $453 million and a fiscal 2021 increase of 60 per cent. Those numbers compare with the less-than-rosy picture that came from the sector in 2020, with the company saying despite the ongoing chip shortage that has hobbled the industry, the rise in consumer interest in electric vehicles and ‘enhanced in-vehicle experiences’ has propelled Analog’s Auto segment forward. 

As for its other segments, Communications grew by 13 per cent over the fourth quarter (hitting revenue of $352 million) and by just one per cent for the fiscal year (hitting $1.198 billion in revenue), while the company’s Consumer segment, which covers signal processing for audio, video and power capabilities, grew by a whopping 107 per cent over the fourth quarter (to $357 million) and by 35 per cent for the fiscal year (to $860 million).

“2021 truly demonstrated the vital importance of semiconductors to the modern digital age,” said Analog CEO Vincent Roche in a November 23 conference call marking the fourth quarter. “We invested ahead of this inflection, building a comprehensive portfolio to better solve our customers’ most complex problems in this ubiquitously sensed and connected world. As we enter 2022, our backlog and bookings remain robust, and we continue to invest in manufacturing capacity, positioning us well for another successful year ahead.”

Roche said along with the organic growth Analog has been experiencing the company’s M&A activity has expanded the company’s scale and scope in recent years. In terms of major acquisitions, Analog has bought two other integrated circuits companies in recent years beginning with LTC in 2017 for $14.8 billion and then this year with Maxim Integrated in a $20-billion deal.

“Since acquiring [LTC] we delivered on our goal to double its historical growth rate. Equally impressive was our ability to improve on Linear’s industry-leading gross margins,” said Roche. “More recently, we completed the acquisition of Maxim Integrated. Similar to previous acquisitions, we’re combining the best from ADI and Maxim to develop a new operating system that enhances customer engagement and drive long-term profitable growth. And I’m very pleased with the progress that we’ve made already.”

But Driscoll says he likes Analog not just for its tech, as the company goes above and beyond when it comes to shareholder appreciation, paying out strong dividends and continuing to buy back shares on a regular basis. Analog’s dividend yield currently sits at 1.6 per cent.

“Their dividend continues to grow at ten per cent where the historical average for companies out there in the world is about six or seven,” Driscoll said. “So, this is a name that we’ve owned for a few years and continue to buy more of it.”