SunTrust: Apple Hurt Analog Devices 'More Than We Expected'

• In a report issued Friday, SunTrust Robinson Humphrey reiterated a Buy rating on shares of Analog Devices, Inc. ADI.
• However, the firm cut its price target by $10.00 to $61.00.
• While pointing out that Apple Inc. AAPL is hurting the company more than they had expected, they remain constructive on likely M&A activity.

SunTrust reiterated a Buy rating on shares of Analog Devices, but trimmed its price target from $71.00 to $61.00, to account for lower EPS expectations for 2016.

Analyst William Stein and his team assured they were not surprised by Analog Devices’ negative update to its fourth quarter and first quarter guidance, given that Apple recently posted similar negative pre-announcements – with EPS guidance down roughly 15 percent. However, they were astonished by the magnitude of Analog Devices’ revision, down ~60 percent quarter over quarter, versus SunTrust’s expectation of a 40 percent decline.

However, the analysts pointed out, with the stock trading below $50, downside seems to be mostly priced in. Thus, they remain “constructive on potential upside from M&A.”

Management recently made it clear to the SunTrust team that “its recent debt raise ($875m net of retirement) was to fund the acquisition of a small (<$1B) private company that will expand ADI's technology footprint in the consumer & comms markets.” If the transaction does not happen, Analog Devices’ management team assured it would use the extra cash to buy back stock and drive EPS accretion.

Having said this, however, the analysts decided to cut their CY16 EPS estimate from $3.57 to $3.05. The new $61 price target is based on a 20x multiple applied to the firm’s CY16 EPS.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.