Option Trade 
Analog Devices, Inc. (NASDAQ:ADI) Calls 
Monday, November 21, 2016

** OPTION TRADE: Buy the ADI MAR 17 2017 70.000 call at approximately $2.80. Place a pre-determined sell at $5.60.

Note: No protective stop losses added -- but if you wish to do so make it $1.15.

by Ian Harvey

Monday, November 21, 2016

Analog Devices, Inc. (NASDAQ:ADI), one of the world leaders in the design, manufacture and marketing of high-performance analog, mixed-signal and digital signal processing integrated circuits, will report fourth quarter fiscal 2016 results on Nov 22. Analysts expect Analog Devices to post earnings of $0.89 per share and revenue of $941.92 million for the quarter.

For the fourth quarter of fiscal 2016, management expects revenues in a range of $910 million to $970 million. On a non-GAAP basis, the company estimates gross margin of approximately 65.5%, operating expenses to be slightly up sequentially, interest and other expense of about $20 million, tax rate of approximately 12% and earnings per share in a range of 84-94 cents.

On a GAAP basis, the company estimates earnings per share in a range of 78-88 cents.

Analog Devices last posted its quarterly earnings results on Wednesday, August 17th. The company reported $0.82 earnings per share for the quarter, topping the consensus estimate of $0.75 by $0.07. Analog Devices had a return on equity of 19.40% and a net margin of 19.49%. The firm earned $870 million during the quarter, compared to analysts’ expectations of $847.43 million.

During the same quarter in the previous year, the business earned $0.77 earnings per share. The company’s revenue was up 11.7% on a year-over-year basis. On average, analysts expect Analog Devices to post $2.92 EPS for the current fiscal year and $3.30 EPS for the next fiscal year.

Analog Devices delivered better-than-expected results for the third quarter, surpassing the Consensus Estimate on both counts. These strong results were driven by a strong consumer market, which offset relatively weak industrial, auto and communication markets.

In 2015, the company successfully incorporated Hittite and expanded the available opportunities. It expects to deliver strong revenue synergies starting 2017.

Analog Devices will acquire Linear Technology in a cash and stock deal worth $14.8 billion. The acquisition is expected to be completed in the first half of 2017.  It will make Analog Devices an industry leader across a huge range of products, customer breadth and scale. The deal will help it to grow significantly in industrial, automotive and communications infrastructure markets.

The transaction is anticipated to be immediately accretive to the company's bottom line results. In addition, the company expects annualized cost synergies of $150 million within the first 18 months following the completion of the transaction.

While its investments are aimed at strengthening the product line and countering increasing competition, the policy of returning cash through dividends and share buybacks will ensure investor loyalty.

Analog Devices Inc. has a market cap of $20.97 billion, a PE ratio of 32.22 and a beta of 1.18. Analog Devices Inc. has a 1-year low of $47.24 and a 1-year high of $68.50. The stock has a 50 day moving average price of $63.99 and a 200 day moving average price of $60.84.

Why Analog Devices Inc?

Despite the shares already soaring some 23% year to date, including 10% over the past month, Morgan Stanley analysts still think Analog Devices, Inc. can climb higher.

Morgan Stanley's Craig Hettenbach said that Analog Devices has room for its estimates to climb in the next couple of quarters, owing to its position with Apple, Inc.'s (AAPL) iPhones, among other catalysts.

Citing the company's expected deal with Linear Technology Corporation (LLTC), Hettenbach said that Analog Devices was among Morgan Stanley's "top picks" heading into 2017. This is because Linear Technology is expected to add 20% to 25% in earnings growth accretion to Analog Devices' estimates and "should create one of the best business models in the S&P 500," Hettenbach argues.

From an organic perspective, Hettenbach explained that, even before the deal, there is "an upward bias to EPS," thanks to a combination of Analog Devices' healthy business conditions and its strict attention to operating expenses.

Other Analyst Input

  • B. Riley reissued a “buy” rating and issued a $80.00 price objective on shares of Analog Devices in a research note on Thursday, October 27th.
  • Evercore ISI raised Analog Devices from a “hold” rating to a “buy” rating and set an $80.00 target price on the stock in a research report on Wednesday, July 27th.
  •  Stifel Nicolaus increased their target price on Analog Devices from $78.00 to $80.00 and gave the company a “buy” rating in a research report on Thursday, September 8th.
  • Zacks Investment Research cut Analog Devices from a “buy” rating to a “hold” rating in a research report on Wednesday, November 9th.
  • Finally, Credit Agricole SA started coverage on Analog Devices in a research report on Wednesday, October 19th. They set an “outperform” rating and a $72.00 target price on the stock.

Eleven analysts have rated the stock with a hold rating and twenty have given a buy rating to the company’s stock. The company currently has a consensus rating of “Buy” and a consensus price target of $77.83.

 Harvey’s Options Volatility Indicator

Conclusion

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the ADI MAR 17 2017 70.000 call at approximately $2.80. Place a pre-determined sell at $5.60.

 Note: No protective stop losses added -- but if you wish to do so make it $1.15.

 

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!

Options traders are not successful because they win.

Options traders win because they are successful.

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