Is Analog Devices the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Analog Devices (NYS: ADI) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Analog Devices.

FactorWhat We Want to SeeActualPass or Fail?
Growth5-Year Annual Revenue Growth > 15%3.6%Fail
 1-Year Revenue Growth > 12%18.9%Pass
MarginsGross Margin > 35%67%Pass
 Net Margin > 15%29.8%Pass
Balance SheetDebt to Equity < 50%24%Pass
 Current Ratio > 1.37.80Pass
OpportunitiesReturn on Equity > 15%26.7%Pass
ValuationNormalized P/E < 2014.46Pass
DividendsCurrent Yield > 2%3.1%Pass
 5-Year Dividend Growth > 10%11.4%Pass
    
 Total Score 9 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With nine points, Analog Devices falls just short of perfection, with slow enough revenue growth over the past five years to miss a perfect 10. But there may be some storm clouds on the horizon for the company as semiconductor demand hits a rough patch.

Analog Devices makes integrated circuits that help convert real-life light, sound, and other phenomena into electrical signals. That translates into a wide range of applications, ranging from aerospace and automotive industries to health-care instrumentation and communications.

Right now, the industry is going through a period of consolidation . Earlier this year, Texas Instruments (NYS: TXN) made a bid to take over National Semiconductor (NYS: NSM) in a $6.5 billion deal. That has left big players like Analog and maybe even Qualcomm (NAS: QCOM) potentially looking for dance partners of their own.

There's no shortage of potential takeover candidates that Analog could go after. Intersil (NAS: ISIL) is an analog expert that makes a logical match, as well as competitors Linear Technology (NAS: LLTC) and ON Semiconductor (NAS: ONNN) . The main question, though, is whether changing market conditions will put the brakes on M&A activity.

In its most recent quarter, Analog Devices disappointed shareholders. A 4% sequential decline in revenue may not seem like a huge deal, especially with management's explanation that the previous quarter had been exceptionally strong. But with many worried that the economy could slip back into recession, any sign of slowing growth makes shareholders antsy.

With a healthy dividend that's unusual for tech companies, reasonable valuation, and strong financial performance, Analog Devices is worth a closer look. It may fall a point short of perfection, but it could be exactly the stock your portfolio needs to thrive.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click hereto add Analog Devices to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our13 Steps to Investing Foolishly.

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of QUALCOMM and Texas Instruments.Motley Fool newsletter serviceshave recommended buying shares of Linear Technology. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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