Admitting that his Sell thesis did not work, Goldman Sachs analyst Toshiya Hari double upgraded Analog Devices (ADI) to Buy as he turns more bullish, with analog units tracking below trend. Further, the analyst noted that the company has exposure to "multiple idiosyncratic revenue drivers" and sees upside to industry-leading margins and to Street estimates.
BUY ANALOG DEVICES: In a research note to investors, Goldman Sachs' Hari double upgraded Analog Devices to Buy from Sell and raised his price target on the shares to $114 from $101. The analyst, who admits his Sell thesis did not work, is turning more bullish on the company as he believes analog units are tracking below trend. This indicates that the end of the cyclical correction may be approaching, barring a prolonged economic recession, Hari contended. Further, the analyst believes Analog Devices has exposure to "multiple idiosyncratic revenue drivers," including Comms Infrastructure and Automotive, and sees upside to industry-leading margins and consensus estimates. The announced closure of two of classic Linear Technology fabs will drive about $100M in cost synergies in the 2021 timeframe driving further upside to industry-leading gross margins as well as operating margins, he argued.
Additionally, Hari told investors that an improved growth outlook, reduced margin volatility, and declining exposure to the Consumer end-market -- particularly Apple (AAPL) -- will collectively drive relative multiples higher.
WHAT'S NOTABLE: Last month, Analog Devices reported better than expected second quarter earnings per share and revenue, but issued guidance below consensus estimates due to government restrictions on a "large communications company." "We have ceased shipments of products to that company, and we are currently reviewing our ability to resume shipments under the recently announced temporary general license," Analog Devices said at the time. While Analog did not name the "large communications company," several Wall Street analysts believe it refers to Huawei. The Trump administration has recently issued a ban on component shipments to the Chinese company.
PRICE ACTION: In morning trading, shares of Analog Devices have gained about 6% to $106.33.
Analog Devices
+5.815 (+5.77%)
Apple
+3.05 (+1.60%)