Analog Devices: Effectively Entered A Growth Cycle

Investment Action - Analog Devices (ADI) has been recommended as a buy due to the belief that it has entered a growth cycle, with 3Q24 showing its first sequential growth since 3Q21 [2][10] - The automotive segment is currently weak, but a recovery is anticipated [2][10] Earnings Review - ADI reported 3Q24 earnings with revenue of $2.31 billion, a 7% sequential increase, surpassing consensus expectations of $2.27 billion [3] - By segment, automotive was flat, industrial grew 6%, communications increased by 10%, and consumer rose by 29% [3] - Gross margin was strong at 67.9%, exceeding consensus by 60 basis points, leading to a net margin expansion of 300 basis points and a sequential EPS growth of 13% [3] Market Dynamics - 2Q24 was identified as the trough of the cycle, with positive sequential growth indicating the start of a recovery [4] - Bookings (excluding automotive) have increased for four consecutive quarters, and the book-to-bill ratio is around 1x, indicating improving demand [4] - In China, bookings grew by double digits across all segments, suggesting a strong recovery momentum [4] - The automotive segment remains weak, primarily due to auto OEMs reducing inventory in response to poor sales outlook [4] Inventory Management - ADI has demonstrated robust inventory management, achieving the largest year-over-year decline in inventory among peers [5] - As of 3Q24, channel inventory is approximately 7 weeks, aligning with management's long-term target [5] Financial Projections - Revenue is projected to rebound to approximately $12 billion, with expectations for EBIT margin to inflect towards previous peak margins of around 51% [7] - Adjustments have been made to growth expectations due to automotive segment weakness, but overall growth acceleration is still anticipated [8] Conclusion - The recommendation remains a buy as ADI is positioned to capitalize on the growth cycle, supported by prudent inventory management and improving macroeconomic conditions [10]