The semiconductor industry was a classic cyclical industry with demand driving pricing up and companies making capital investments to meet that demand. This would eventually lead to increased supply which exceeded demand and a big decline in prices combined with a drop in capital investments. In recent years, investors have argued that the traditional cyclical dynamics may no longer apply since demand appears to be constantly increasing as semiconductors find their way into more and more devices. Cross-border consolidation within the industry has often been blocked by regulators concerned about maintaining access to a critical resource within their country. Whether the industry returns to its cyclical roots remains to be seen but many of the semiconductor stocks that have appreciated significantly in the last couple of years appear to be now cooling off.
In this environment, it was interesting to see Bruce Evans spend $1.32 million to acquire 8,001 shares of semiconductor company Analog Devices (ADI) at an average price of $164.98 per share. Mr. Evans has been an independent Director on Analog Devices’ board since June 2015 and this is his second largest insider purchase of the company since he joined the Board of Directors. Mr. Evans is currently a Senior Advisor to Summit Partners, a venture capital firm with $42 billion in assets under managements that he has been involved with for 35 years. He is the Chairman of the Board of Trust at Vanderbilt University and has served on 35 boards including that of 14 public companies. When an independent board member that has been involved in the company for several years and has several decades of experience buys shares, I take note.
In the case of Analog Devices, Mr. Evans’ purchase of Analog Devices comes just weeks after the company’s massive $21 billion acquisition of fellow semiconductor company Maxim Integrated closed. The deal, which was announced in July 2020, took 402 days to complete because of regulatory reviews in the U.S., China, South Korea and the European Union. Both companies sported best in class gross margins and if deal synergies are realized, it will help the combined company improve its net margin over time.
The combined company is expected to generate $8.2 billion in revenue from over 125,000 customers and $2.7 billion in free cash flow. The stock hasn’t done much during the last six months but managed to eke out a small gain compared to peers like Micron (MU), NXP Semiconductors (NXPI) and Infineon Technologies (IFNNY), which have posted negative returns during the last six months. Texas Instruments (TXI) was essentially flat during the last six months, has comparable gross margins to ADI, better net margins and a higher dividend yield. ADI has best in class levered FCF margins of 31.66% and is expected to return $1 billion in FCF generated from the business to its investors through dividends and share buybacks. Even though the company has announced several buybacks over the years, shares outstanding haven’t changed much during the last three years. ADI’s current annual dividend of $2.76/share works out to a dividend yield of 1.64% and a payout ratio of just 43%. The dividend is likely to increase over time and if this semiconductor cycle continues its upward trend, I can see why Mr. Evans is buying stock on the open market.
Welcome to edition 588 of Insider Weekends. Insider buying increased last week with insiders purchasing $65.59 million of stock purchased compared to $43.05 million in the week prior. Selling on the other hand increased to $2.69 billion compared to $1.99 billion in the week prior.