Linear Technologies (LLTC)

31 Mar 2016 23:52
Tags adi lltc stock_review_2016

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At one time in our past we lived in a simple analog world and were content. Yet, over the last 25 years digital technologies have accelerated so much that the digital world is now an integral part of our daily lives and it is hard to imagine life without these new features.

As the world becomes more dependent on digital technology, the technology that converts analog to digital and back to analog will become a necessary staple in our everyday lives. These pieces of technology are far from being the hippest, coolest, or cutting edge technology but they are necessary and companies, such as Analog Devices (ADI), that have latched onto this market are becoming dividend growth cash cows in a growing market.

Another company that operates in this market is Linear Technologies (LLTC). LLTC currently trades just above $44 with a 2.85% dividend and has been a dividend grower for 23 years:

LLTC_DivChart.png

Being in a growth market with an attractive dividend and significant historical growth may sound like a reasonable investment but deeper digging is required to determine if the dividend and growth rates are sustainable.

Note: The following financial analysis is based on LLTC’s 2015 annual report is compared & contrasted to their primary competitor Analog Devices (ADI) 2015 annual report.

Liquidity

LLTC ADI Advantage
Current Ratio 8.66 3.66 LLTC
Quick Ratio 7.55 3.14 LLTC
Days to Collect Receivables 44.29 49.62 LLTC
Days to Sell Inventory 102.32 127.87 LLTC
Liquid Current Assets $1.38B $3.49B ADI
Long Term Debt none $498M LLTC

Both LLTC and ADI have very strong balance sheets with lots of cash & short term investments on hand to easily handle liabilities and debt but overall LLTC has the advantage.

Profitability

LLTC ADI Advantage
3 yr Revenue Growth Rate 7.28% 14.33% ADI
Operating Expense Ratio 30% 42% LLTC
Net Income as a % of Sales 35% 20% LLTC
Return on Assets 28% 10% LLTC

Both LLTC and ADI are seeing significant revenue growth and manage costs to generate net income extremely well. But LLTC is slightly more efficient and has the advantage.

Credit Risk

LLTC ADI Advantage
Debt Ratio 0.16 0.26 LLTC
Interest Rate Coverage Ratio no debt 0.76 LLTC

Wow, both companies have little exposure to debt! LLTC with no long term debt tilts in their favor.

Future Growth

LLTC ADI Advantage
Capex to Depreciation Ratio 1.17 1.18 ADI
R&D Investment $267M $637M ADI

ADI has a clear advantage and explains why they have had the better growth rate in revenue. LLTC in previous years was spending much less than shown above but have recently dramatically increased spending. In the most recent quarter, LLTC announced an expansion of their Singapore facilities that will double their volume. With ever growing digital devices LLTC needs to follow ADI’s example with a consistent investment but the downside will be a drag on profitability & free cash so they need to find the right balance.

Shareholder Value

LLTC ADI Advantage
P/E Ratio 20 25 LLTC
Book Value per Share $6.44 $15.98 ADI
Dividend Yield 2.85% 2.83% ADI

LLTC’s 5 year P/E average is 20 so its current share price is in-line with historical share price. ADI’s 5 year P/E average is 21 so it is slightly overvalued to current prices but does have a more favorable book value.

Conclusion

LLTC is a solidly run company with great operating margins and no debt. Their dividend and future dividend growth are on solid ground and I’m expecting a growth rate from 7 to 8% annually going forward. A fair share price is $45 and anything below $43 would be a bargain. Their overall financials compare well to their biggest competitor and I do slightly favor LLTC due to operating margins but I would not be shy to buy ADI if the share price drops below $55 a share.

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