Today we're going to take a closer look at large-cap Technology company Analog Devices, whose shares are currently trading at $180.75. We've been asking ourselves whether the company is under or over valued at today's prices... let's perform a brief value analysis to find out!
Analog Devices, Inc. designs, manufactures, tests, and markets integrated circuits (ICs), software, and subsystems that leverage analog, mixed-signal, and digital signal processing technologies. The company belongs to the Technology sector, which has an average price to earnings (P/E) ratio of 26.5 and an average price to book (P/B) ratio of 5.57. In contrast, Analog Devices has a trailing 12 month P/E ratio of 47.9 and a P/B ratio of 5.5.
P/B ratios are calculated by dividing the company's market value by its equity's book value. Equity refers to all of the company's assets minus its liabilities. Traditionally, a P/B ratio of around 1 shows that a company is fairly valued, but owing to consistently higher valuations in the modern era, investors generally compare against sector averages.
P/E rations can be placed into context by dividing them by the firm's expected 5-year EPS growth rate, which gives us its Price to Earnings Growth (PEG) ratio. Analog Devices's PEG ratio is 1.01, which tells us the company is fairly valued in terms of growth. PEG ratios under 1 are considered an indicator of undervalued growth, but we need to keep in mind that many successful companies with excellent share performance have maintained much higher PEG ratios.
As always, a quantitative approach to a stock should be supplemented with a look at qualitative factors, such as the competence of its management team, quality of its corporate culture, and the wide variety of social and economic factors that can impact the success of its product.