Linear Technology Gives a Mildly Disappointing June Forecast


Linear Technology reported solid fiscal third-quarter earnings but gave investors a fourth-quarter outlook that was modestly less optimistic than our expectations and indicates that customers are still quite cautious in terms of placing new chip orders. We will maintain our fair value estimate and wide-moat rating for the firm.

Linear’s analog chip sales were $314.5 million for the March quarter, up 3% sequentially. After a cyclical downturn in the analog chip space, driven by a shaky macroeconomic environment, Linear began to see a bounce back in chip demand in the quarter, especially in the industrial and automotive end markets. However, the company believes that customers are still cautiously placing chip orders and are carrying low chip inventory levels on-hand. Nonetheless, Linear’s gross margins of 75% and operating margins of 44% remained stellar and were consistent with the December quarter.

For the June quarter, Linear expects revenue to 1% to 4% sequentially. We are modestly disappointed by the forecast, as we expected mid-single-digit growth in the middle of 2013 and a strong inventory replenishment among Linear’s end customers. Street estimates called for 5% growth in the June quarter as well. Linear believes that automotive and industrial end market production is growing at a faster pace than chip orders, again pointing to tight inventory through the channel. We think Linear’s forecast may push out a stronger snap-back in demand to later quarters (unless further severe economic headwinds arise), which doesn’t cause a material change to our fair value.

However, we suspect that the market already priced in a full cyclical recovery for Linear and that Linear’s recent stock prices didn’t reflect that the industry is still much closer to a cyclical bottom than a top. Thus, we view the selloff in analog chip stocks today as a correction that aligns stock prices with the reality that the industry will someday fully recover from the latest cyclical downturn, but perhaps not as quickly as anticipated.


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