On Thursday, BofA Securities increased the price target for Analog Devices (NASDAQ: NASDAQ:ADI) to $260 from $225, while reiterating a Buy rating on the stock. This adjustment follows the company's reported sales for the second fiscal quarter (FQ2) in April, which exceeded expectations by 3%, signaling what the firm believes to be the cycle's bottom.
The third fiscal quarter (FQ3) sales are projected to rise by 5.1% quarter over quarter to $2.27 billion, which is roughly $100 million or 5% above the consensus. This guidance suggests that Analog Devices may be starting its recovery approximately a quarter earlier than its industry peers.
The positive outlook is further supported by the company's guidance indicating sequential growth across all segments for the upcoming quarter, with consumer and industrial sectors leading the way and modest growth expected in the automotive sector.
Despite limited visibility, BofA Securities anticipates continued growth into the fourth fiscal quarter (FQ4) in October, roughly in line with the previous quarter's performance.
The firm's assessment is bolstered by a book-to-bill ratio now trending above 1.0x. However, there is an ongoing trend of under-shipping, which amounted to $100 million in FQ2 and is expected to continue into FQ3, potentially reaching around $30 million.
In light of the anticipated recovery, BofA Securities has revised its pro forma earnings per share (EPS) estimates for fiscal years 2024 and 2025 to $6.23 and $8.14, up from $5.62 and $6.92, respectively. The firm also suggests there is potential for EPS to return to the $9-$10 range in fiscal years 2025 and 2026 if demand rebounds more quickly than currently anticipated.
The raised price objective to $260 is based on an unchanged 34x calendar year 2025 estimated enterprise value to free cash flow (EV/FCF) multiple. This reflects the firm's revised EPS estimates and its outlook for the company's financial performance.
InvestingPro Insights
Analog Devices (NASDAQ: ADI) has demonstrated resilience with a notable 12.16% price total return over the last week and a 26.45% return over the last month, indicating a positive market reception to recent developments. The company's commitment to shareholder returns is evident with a 1.53% dividend yield and a history of raising its dividend for 22 consecutive years, showcasing its financial stability and investor-friendly approach.
While BofA Securities has set a high price target for ADI, InvestingPro data reveals a high P/E ratio of 50.67, suggesting that the stock is trading at a premium compared to earnings. Investors should be aware that the stock is in overbought territory according to the RSI, which could indicate a potential pullback. However, with analysts predicting profitability this year and a strong return over the last five years, ADI remains a prominent player in the Semiconductors & Semiconductor Equipment industry.
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