Thursday 27 July 2017

Share watch: Analog keeps wary eye on what's going on in China

'Analog recently announced it intends buying a major competitor, Linear Technology, for $14.5bn. This could be a game changer for Analog.' Photo: PA
'Analog recently announced it intends buying a major competitor, Linear Technology, for $14.5bn. This could be a game changer for Analog.' Photo: PA

John Lynch

World trade in 2017 is an absorbing study just now. There are so many ideologies being challenged and individual battles fought that any analysis is pure guesswork. However, in the middle of this complicated global picture there are localised tussles being fought out which contain their own drama. One is the struggle for domination of the semiconductor industry between the 'old hands' in the US and a determined and resourceful 'challenger' from China.

I happened upon this fascinating head-to-head while I was researching the investment attractions of the Massachusetts-based Analog Devices (Analog), one of the oldest semiconductor companies around.

I reminded myself that semiconductors are in pretty much everything there is these days - communications, computers, instrumentation, autos, military devices and consumer goods.

Analog has the advantage of being at it for more than 50 years. The company currently has revenues that exceed $3.4bn (€3.2bn). It has 10,000 employees and fabrication plants in the US, Philippines and Limerick (which it established 40 years ago, and today employs 1,000 people). It also has 30 design centres worldwide, including Canada, China, Germany and India.

The company markets its products to customers worldwide. Its largest market is the industrial process sector, which contributes 44pc to group revenues. The consumer and communications markets account for 20pc each of sales. The smallest grouping is automotive.

It contributes only 16pc to Analog's revenues. However, experts are of the opinion it is the area of greatest potential.

The silicon content is likely to rise in autos with the development of advanced driver assistance and connected cars. Auto-producing countries (and companies) now regard the semiconductor industry as a priority.

In the face of a narrowing customer base and increased costs, semiconductor companies are scrambling at a record pace to build scale. China has the ambition to become self-sufficient in semiconductors and reduce its imports.

Chinese imports exceed $100bn (€94.2bn) per annum, even more than it spends on imported oil. It is planning to subsidise its 130 fabrication plants by a staggering $150bn (€141.3bn) and achieve self-sufficiency by 2030.

With this in mind, the US semiconductor industry has chosen to restructure.

Industry leader Texas Instruments bought National Semiconductor Inc, while another producer, Qualcomm, acquired the Dutch concern NXP, making it worldwide leader in auto semiconductors. Japan's Softbank recently bid for the UK chip producer (and Apple supplier) ARM Holdings plc, and the US producer Intel has also got in on the act.

Analog recently announced it intends buying a major competitor, Linear Technology, for $14.5bn (€13.6bn).

This could be a game-changer for Analog. It will broaden its product range, lower manufacturing costs, boost profitability, increase its share in the fragmented market and add value for its investors.

Net income in 2016 was $860m (€810m), an increase of 14pc on the previous year.

US sales account for 40pc of group sales, and the remaining 60pc comes mainly from Europe, China and Japan. European sales (Germany, Sweden, UK and France) amounted to $950m (€894m), or 27pc of group sales.

China is Analog's third-largest market, with $575m (€541m) (17pc) of sales.

A punter who has held Analog shares for five years has been well rewarded. The stock has doubled to a record, at more than $80 (€75). It has an inflated price earnings multiple of 29, giving the company a market value of $24bn (€22.6bn).

The company continues to generate strong cash flow; last year free cash flow was a healthy $1.2bn (€1.13bn). Nor have investors been neglected as share buy-backs and dividends payments last year totalled a considerable $870m (€819m).

Analog is a very capable company and worth a flutter, but it has to keep a very wary eye on China.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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