Gathering New Information about Stocks, Health, and Sports

Introduction

Linear Technology (LLTC) is an $8.08 billion company in the semiconductor industry. Market capitalization competitors in this industry include Xilinx, KLA Tencor, and Altera. The semiconductor industry is down 0.02% over the past year compared to the S&P 500 which is down 8.28% during the same period. Over the past month, the industry has been up 4.67%, while the S&P 500 has been down 0.24%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, as there seems to be evidence of confidence in equities, semiconductor stocks like Linear Technologies will see future benefits. Also Linear Technology’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Linear Technology produces. According to Reuters, Linear Technology, “designs, manufactures and markets a line of standard linear integrated circuits.” This company helps produce a vast amount of products for a vast amount of customers. Some specific products mentioned include amplifier circuits, data converters, and wafer fabrication. More specifically amplifier circuits are made for applications in the form of video or fast communications. Various voltage units are used to help power up different applications and products. Then there are other types of data converters that help convert digital signals to analog signals, and vice versa.

These different products are later used for larger products, traditionally sold to OEMS. Some of these products include computers, notebooks, MP3 players, cell phones, and computer peripherals, among others. Linear operates all over the world, which has helped recent financial figures, due to a weakened dollar. Therefore, Linear Technology has a solid business model that will allow it to succeed in the future and in the semiconductor industry.

Growth

Linear has illustrated solid growth prospects over the past year. According to Reuters, Linear reported a $1.08 billion revenue product last year. This number is up over 2.55% than it was the previous year. Compared to the industry’s average of 2.01%, investors see the relative strength compared to other competitors. This number is lower than the company’s five year average of 37.17%. However competitor annual averages of -0.07% (Xilinx) and -0.22% (Altera) are lower than Linear’s current figures. And given that Linear’s five year average of 16.15% is higher than the industry’s five year average of 11.96%, this company has the potential to move even higher. Linear’s earnings grew at a strong 14.18% last year—a number much lower than the industry average. Competitors such as KLA Tencor only saw a 9.75% fall and Altera saw a disappointing decrease in earnings of 4.14%. Therefore, both earnings and revenue growth is strong for Linear.

In addition, Linear has kept its costs under control. According to Reuters, Linear has reported gross, operating, and net profit margins of 77.24%, 48.51%, and 33.46% respectively over the past year. Moreover, these numbers are above the industry averages of 10.01%, 4.19%, and 2.97%, respectively. The numbers are also above or near the company’s five year average respective numbers of 77.58%, 51.93%, and 39.64%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor Xilinx’ respective operating and net income averages of 22.88%, and 20.31%. The same comparison can be made for KLA Tencor and Altera. Therefore, Linear has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors.

Compiling all this information together and investors comes across ROE. Over the past year, Linear reported an ROE of 45.01%. Therefore, out of all shareholder equity, more than 45% (above five year average of 14.77%) come from earnings instead of debt or stock. This number is much stronger compared to the industry average of 2.55%, and the number is better than some competitor averages 21.72% (Xilinx) and 26.57% (Altera). Therefore, Linear has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Linear cannot continue its success. The same logic applies to Linear’s 19.48% ROA (above industry average) 21.30% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. Linear has a forward P/E ratio of 22.34 and a price to sales ratio of 7.11 compared to the industry’s respective 7.89 and 0.81, which shows a relatively undervalued status. In comparison, the rest of the market cap competitors have ratios that higher than Linear Technology. Altera has a forward price to earnings ratio of 26.52 and price to sales ratio of 5.45. What makes Linear Technology’s figures are more enticing is these competing firms aren’t growing so greatly as strongly as Linear Technology. Linear Technology can now be seen as both a growing and valued company. Moreover, Linear Technology has a relatively low PEG (1.33) ratio compared to other competitors’ numbers as well.

Efficiency

Linear Technology is efficient. Inventory turnover at 16.36 is strong compared to other industry market-cap rivals (Xilinx). Moreover, asset turnover is also strong at 0.58 compared to competitor figures. Receivables turnover were at 7.77, but cash is not an issue for Linear Technology. In terms of liquidation, Linear Technology current ratio is at 7.37. This number is a bit risky, but the company’s capital expenditures have increased (28.22%) which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 92.48% of all Linear Technology shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Linear Technology performed poorly in the past year. The company’s share price has decreased 1.14% year-to-year. This type of growth is expected for a recessionary-type economy, especially considering the fact that the housing market and construction is doing so poorly. There seems to be some support at the 28 dollar share price range dating back to late January 2008. The last time Linear Technology reached this amount the company rebounded and appreciated 29%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Linear Technology illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 73.12, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Linear Technology according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Linear Technology is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
June 6th, 2008