Turning Good Into Great at Analog Devices

Analog Devices Inc. is today the toast of the investment community.

Financial analysts are queuing up to recommend the stock to investment clients and raising their price target for the shares, sparking a frenzy that has boosted the stock in recent months. On Thursday, Oct. 7, Analog Devices’ stock price closed at $31.91, only a tad short of its 52-week high price of $32.19.

It’s not only analysts that are thrilled with Analog Devices. The company is getting positive raves from ratings agencies, too. Standard & Poor’s recently jacked up its corporate credit rating for ADI to A- from BBB+, citing the company’s "good market position in the analog semiconductor segment, conservative balance sheet, and consistent profitability," according to analyst Lucy Patricola who adds, "the company's solid technology position and prudent management through operating cycles, and good cash balances should provide a good degree of downside ratings protection."

Analog Devices deserves the commendation from investors and financial analysts. The company has benefited from surging demand for analog products in the last year, no doubt, but it has a lot more to its credit than a component shortage and demand-driven upturn. Analog Devices is acknowledged to be among the most conservatively managed companies in the semiconductor market, quietly inserting technologically advanced components into OEM products from its location in Massachusetts and via sales outlets and through distribution partners worldwide.

That’s not all. Analog Devices enjoys tremendous goodwill in the electronics market. It’s hard to get a negative comment about the company from anyone -- rivals included -- aside from mild complaints by journalists grousing that the company is not "press-savvy."

True, Jerry Fishman, president and CEO of Analog Devices, grants few interviews and is reputed to prefer working quietly behind the scene to advance his company’s objectives with customers, suppliers, and investors. Fishman is famed also for never allowing current industry condition, market perception, or other non-tangible developments to drive longer-term strategies for his company.

If Analog Devices seems to be not so press-savvy, that would be because the company’s laser focus on customer satisfaction and intense engineering mindset pushes almost everything else aside. Almost four years ago, for instance, the company initiated a range of far-reaching reorganization actions designed to improve its overall performance and give it the opportunity to offer customers higher-end and technologically advanced products. Like its top two rivals -- Texas Instruments and Maxim Integrated Products -- the company has increased its focus on proprietary analog products, leaving smaller rivals to fight for the crumbs of commodity parts.

As commoditization crept up the analog food chain, Fishman believed it was time for the company to increase investments into innovative programs that would enable the company to offer higher value to customers, at a higher premium. That reorganization was not initiated because Analog Devices was underperforming. In fact, the company was humming along nicely. It didn’t need to refine its operation at the time, but Fishman was convinced that was the perfect time to restructure the company.

“When you are failing, change is easy because everyone knows the alternative is that you go out of business; but when you have a successful business it’s hard to get a very large and complex organization to embrace the idea that now is the time to make some changes,” Fishman said in an interview with me earlier this year. “We had a great business, and if we did nothing it would stay a good business, but we thought if we could figure out some ways to do things better we could make a good business into a really great business.”

Next week, I will post in my column excerpts from my interview with Fishman, because the issues he addressed remain relevant today. I'll also explore the subject everyone in the industry has been pondering for at least the last two years: Who will succeed Jerry Fishman at Analog Devices? Suggestions welcome.