Linear Technology (LLTC) is scheduled to announce its second quarter results tomorrow after the market closes. In view of the limited revisions to estimates, we think analysts are confident about their expectations for the quarter.
First quarter Highlights
Linear’s first quarter results were quite good, with earnings growing strongly and exceeding the Zacks Consensus Estimate by a wide margin, despite the fact that revenue was more or less in line with expectations.
Linear’s problem during the quarter was with regard to internal lead times, which although down slightly, remained well above the historical 4-6 week range. Customers started delaying orders as it became apparent that Linear would be incapable of fulfilling them. However, management assured investors that lead times would be back to historical levels by year end, so order rates may improve going forward.
In the past, Linear has generated a significant amount of quarterly revenues from turns business. With lead times improving slightly in the last quarter, turns required for the fourth quarter are also down. However, Linear’s guidance indicates caution in our opinion, evident from the fact that turns sales baked into the guidance are quite low in comparison to historical standards.
Linear’s $373-388 million revenue expectation for the fourth quarter represents a 0-4% sequential decline, although normalizing for the 14-week quarter, this implies a decline of 9.0%. What’s more, Linear expects operating expenses to be up, mainly on account of labor charges related to the extra week of operation.
Agreement of Analysts/ Magnitude of Revisions
We considered Linear’s analyst estimates for the next two quarters and fiscal years 2011 and 2012 and noticed that analysts were basically sticking to their earlier expectations. This is not surprising, since Linear usually gives conservative guidance and rarely misses its own expectations. Analysts appear to have considered the slowdown in the consumer and computing markets and are, therefore, in complete agreement regarding the company’s performance going forward.
Our Take
We think Linear Technology is a very stable play in volatile market conditions. In the past, Linear had been able to maintain its high margins because of its R&D prowess and speedy order fulfillment. We expect any deviation from these trends to be temporary. We think management execution has proved its worth over a period of time.
We noted the earnings surprise percentage in the preceding 4 quarters. Since the March quarter of 2010, Linear’s surprise percentage has gone down considerably. Therefore, we think the accuracy of estimates is increasing. All things considered, we are looking for a small positive surprise when the company reports after the market closes tomorrow.
Linear shares carry a Zacks Rank of #3, implying a short-term Hold recommendation. Peer companies Intersil Corp (ISIL) and Semtech Corp (SMTC) also share the same rank.
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