Bernstein upgrades Analog Devices on Q3 beat, improving risk-reward

Investing.com -- Bernstein upgraded Analog Devices to Outperform from Market Perform and lifted its price target to $465 from $430, citing improving risk-reward following a strong fiscal third-quarter report and outlook.

The chipmaker’s fiscal third-quarter results topped expectations, with revenue of $4.022 billion and earnings per share of $3.45, versus Street estimates of $3.922 billion and $3.35. Bernstein said the upside was broad-based but driven in particular by the automotive segment, with industrial, consumer and communications also coming in above expectations.

Gross margins were 72.5%, in line with expectations, while operating expenses came in below forecasts.

Shares in the chipmaker rose 1% in U.S. premarket trading.

The fourth-quarter outlook showed "another significant beat," analyst Stacy Rasgon said, with guidance of $4.3 billion in revenue and $3.86 in earnings per share, compared with Street estimates of $4.085 billion and $3.55. He said all segments came in above consensus, with industrial growth guided at high-single-digit percentage growth sequentially, automotive at low-single digits, communications at 10%, and consumer at high-single digits.

Gross margin guidance was raised about 150 basis points sequentially to roughly 74%, well above the Street’s 72.3% estimate, which Rasgon attributed to continued revenue growth, mix and pricing. Operating margins of 52% are seen roughly 200 basis points above Street expectations.

"ADI results and execution continue to be really solid amid a continued industrial recovery, partially as a function of some of their more idiosyncratic exposures, where growth is solid and they tend to be more differentiated than some of their more catalog-focused competitors, as well as solid channel management," Rasgon wrote.

The datacenter business is also gaining traction, he noted, "driving the Comm segment in particular into a growth trajectory that increasingly appears sustainable," while also lifting gross and operating margins.

Bernstein said it had stayed on the sidelines on the stock for some time, largely due to valuation, but now sees the shares trading in the "low 20s" on its new fiscal 2027 EPS estimate, with $20 in EPS by 2028 looking "quite plausible."

Rasgon acknowledged some may view current industrial growth, above 50% year-over-year, as peaking, with fewer gross margin utilization benefits ahead. Still, the analyst said he is "growing more positive on the overall growth trajectory" and believes valuation may have become disconnected from it, tipping the risk-reward balance positive enough to prompt the upgrade.

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