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Citi Boosts Analog Devices To Buy, Says 'Apple Win' Could Boost Earnings

  • Shares of Analog Devices, Inc. (NASDAQ: ADI) have lost more than 12 percent over the past three months despite gaining more than 13 percent from a year ago.
  • Christopher Danely of Citi upgraded Analog Devices to Buy from Neutral with an unchanged $66 price target.
  • Danely noted his bullish stance stems from the company's "solid" business model, increasing margins, and upside from the Apple Inc. (NASDAQ: AAPL) design win.

Christopher Danely of Citi previously held a Neutral rating on Analog Devices as the stock had less than 20 percent upside to his $66 price target. However, the stock has sold-off as of late, prompting the analyst to upgrade the stock to Buy given an unchanged outlook.

According to Danely, Analog Devices' core business is "mixed" with demand from the auto and industrial end markets proving to be "sluggish." However, the analyst is expecting demand from the communications end market to improve, especially when considering the company will likely supply Apple with components for next-generation iPhone and iPad devices.

Danely said supplying Apple will provide additional earnings growth. The analyst estimated that an Apple design win could contribute $450.4 million (13 percent incremental revenue) in 2016 and $0.36 of incremental earnings per share next year. However, the company's win will likely come at a 30.0 percent margin which will lower the company's overall margins to 33.2 percent.

Looking past next year, Danely suggested that Analog Devices can grow its earnings per share at a 20 percent compounded annual growth rate, driven by the "strength" from the Apple design win. The analyst further added that the company could see peak earnings per share of $4.50 – roughly 50 percent above his 2015 earnings per share estimate of $3.00.

Finally, Danely pointed out that Analog Devices' dividend yield of 3.0 percent is roughly 25 percent higher than the semiconductor group average of 2.4 percent and roughly 30 percent higher than the S&P 500 yield of 2.3 percent.

Bottom line, the stock's valuation is "attractive" at 17.1X 2016 earnings per share estimate and represents a discount to the peer average of 17.5X. A $66 price target is based on a 21X 2016 earnings per share multiple due to the company's higher earnings growth.

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