How To Add Analog Devices To Somachine Basic

Here at The Motley Fool, I've long cautioned investors to keep a close eye on inventory levels. Information technology'southward a part of my standard diligence when searching for the market place's best stocks. I think a quarterly checkup can assistance you spot potential problems. For many companies, products that sit down on the shelves besides long tin can become big trouble. Stale inventory may exist sold for lower prices, hurting profitability. In extreme cases, it may be written off completely and sent to the shredder.

Bones guidelines
In this serial, I examine inventory using a simple rule of pollex: Inventory increases ought to roughly parallel acquirement increases. If inventory bloats more quickly than sales grow, this might be a sign that expected sales haven't materialized.

Is the electric current inventory situation at Analog Devices (NYS: ADI) out of line? To effigy that out, start by comparing the company's figures to those from peers and competitors:


Analog Devices	eighteen.9%	12.8%
NXP Semiconductors (NAS: NXPI)	6.9%	21.5%
Linear Technology (NAS: LLTC)	26.eight%	33.half-dozen%
Microchip Technology (NAS: MCHP)	35.3%	58.0%

Source: Capital letter IQ, a partition of Standard & Poor'southward. Data is electric current every bit of latest fully reported quarter. TTM = trailing 12 months.

How is Analog Devices doing by this quick checkup? At first glance, OK, it seems. Trailing-12-month revenue increased 18.nine%, and inventory increased 12.8%. Over the sequential quarterly period, the trend looks OK but not great. Revenue dropped 4.2%, and inventory grew 1.ix%.

Advanced inventory
I don't stop my checkup there, because the blazon of inventory can affair even more than the overall quantity. There'south even 1 blazon of inventory bulge we sometimes similar to run into. You tin can check for it by examining the quarterly filings to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a unmarried category.)

A company ramping upwardly for increased demand may increase raw materials and work-in-progress inventory at a faster charge per unit when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a inkling to a brighter hereafter, and a clue that most other investors will miss. Nosotros call it "positive inventory divergence."

On the other paw, if nosotros run across a big increment in finished goods, that often means product isn't moving as well every bit expected, and it'due south time to hunker downward with the filings and conference calls to discover out why.

What's going on with the inventory at Analog Devices? I chart the details below for both quarterly and 12-month periods.

Source: Capital letter IQ, a division of Standard & Poor's. Data is electric current equally of latest fully reported quarter. Dollar amounts in millions. FY = financial yr. TTM = abaft 12 months.

Source: Capital IQ, a division of Standard & Poor's. Data is electric current equally of latest fully reported quarter. Dollar amounts in millions. FQ = fiscal quarter.

Allow'due south dig into the inventory specifics. On a abaft-12-month basis, raw materials inventory was the fastest-growing segment, upwardly 70.7%. On a sequential-quarter basis, raw materials inventory was also the fastest-growing segment, upwardly eight.8%. Analog Devices may display positive inventory divergence, suggesting that management sees increased demand on the horizon.

Foolish lesser line
When yous're doing your enquiry, remember that aggregate numbers such as inventory balances often mask situations that are more complex than they appear. Even the detailed numbers don't give us the concluding discussion. When in doubt, listen to the conference call, or contact investor relations. What at kickoff looks like a problem may really signal a stock that will provide the market's best returns. And what might look hunky-dory at first glance could actually be alarm you lot to cut your losses before the rest of the Street wises upward.

I run these quick inventory checks every quarter. To stay on top of the inventory story at your favorite companies, just use the handy links below to add together companies to your free watchlist, and we'll deliver our latest coverage right to your inbox.

Add Analog Devices to My Watchlist.
Add together NXP Semiconductors to My Watchlist.
Add Linear Technology to My Watchlist.
Add Microchip Engineering science to My Watchlist.

At the fourth dimension thisarticle was published Seth Jayson had no position in any visitor mentioned hither at the fourth dimension of publication. You lot can view his stock holdings hither. He is co-advisor ofMotley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Motley Fool newsletter services have recommended buying shares of Linear Technology and NXP Semiconductors. Attempt any of our Foolish newsletter services free for 30 days. Nosotros Fools may not all concur the same opinions, merely we all believe that considering a diverse range of insights makes united states of america better investors. The Motley Fool has a disclosure policy.