Linear Technology: Goldman Sachs On The Sidelines Despite Strong Fundamentals

Goldman Sachs has started coverage of Linear Technology Corporation LLTC with a Neutral rating, saying that the company's strong fundamentals is already priced in to the stock.

Milpitas, California-based Linear Tech makes analog integrated circuits. The company's linear circuits are used in various applications, such as factory automation, industrial and laboratory instrumentation, telecommunications, and networking products; automotive electronics, tablet, notebook, and desktop computers.

"While we are positive on LLTC's favorable end market exposure and track record executing at coverage-best margin levels, the company's current valuation premium fairly captures these positive aspects, in our view," Goldman analysts wrote in a note.

Goldman sees 3.5 percent downside to its price target of $46.

According to a note from Goldman, Linear Tech has the most attractive end market mix. The analysts highlighted that only about 3 percent of the company's sales are tied to the consumer segment versus 20 percent plus at peers such as Texas Instruments Incorporated TXN, Maxim Integrated Products Inc. MXIM, and Analog Devices, Inc.ADI.

The analysts said the company generates 44 percent of its revenue from general industrials and participates in markets only if it has a scope for strong margins.

"We are positive on the company's automotive exposure (about 20% of revenue) and see the potential for sustained tailwinds in the battery management (BMS) business, particularly given China's apparent commitment to driving growth in electric vehicles over the coming decade," the analysts said.

Goldman noted that Linear Tech has the strongest margin profile within its coverage, posting gross margins of 75 percent or greater over the past five years.

"We are positive on LLTC's ability to continue executing at a high level, and model gross margins expanding slightly to 76% in CY 2017 vs. 75.7% in CY 2015. The company's returns are similarly strong, and we model the company posting CROCI of 48% in CY 2016/17 vs. our coverage median of about 25% and an analog median of about 35%," Goldman noted.

However, the analysts said the current valuation levels fairly capture the company's strength. LLTC currently trades at 2.5x NTM P/E premium to peers within Goldman's analog coverage (22x NTM PE vs median analog ex-LLTC of 19.4x).

As such, Goldman sees little reason for investors to take an active view on the stock at these levels.

Shares of Linear Tech closed Wednesday's regular trading at $47.67.