When we were doing our sector analysis exercise across all 11 GICS industries, we used an objective method to determine which stocks to select, mainly the Quantigence Q-Score methodology that we’ve designed. This meant that some of the stocks we thought were great didn’t exactly rank that high, while others we had never heard of came across our radar.
When we evaluated the information technology sector, IBM was a clear winner with the highest Q-Score in our entire universe. We then needed to pick a second stock and had to choose between Automatic Data Processing (ADP) and Linear Technology Corporation (LLTC). Using the rules of diversification, we chose LLTC because their business model was the least like that of IBM. When we chose LLTC, we had never heard of the company before and knew nothing about them except that they are a small company that makes chips. We get all excited when we’re getting ready to invest in a business we know little about and immediately want to take a look under the hood.
Linear Technology Corporation (LLTC) was founded in 1981 and presently has 4,685 employees and a market cap of almost $11 billion dollars which barely exceeds our cutoff of $10 billion. Now before we get down to brass tacks, we just need to say this. Their website looks like it was built in the mid-1990s by a couple of high school kids:
There’s nothing even remotely appealing about their site, and it gets even worse when you try to find their latest investor presentation. They don’t have one. Now we don’t think this is necessarily a bad thing. Instead of wasting money on flashy websites and an “investor relations team”, which usually consists of people who have the same skillsets as your average HR person, LLTC has instead decided to focus on building a business that’s really quite impressive.
Whenever we start looking at any given stock, we pop by Seeking Alpha to see what retail investors are saying about it. What we found is that there is very little interest in LLTC on Seeking Alpha except for this excellent article. In this article, there were a few takeaways that we found quite compelling.
Firstly, LLTC operate in the analog semiconductor industry which is a $44 billion market with Texas Instruments (TXN) being the biggest player with 18% market share, and LLTC having less than 4% market share. Analog semiconductors are unique in that the pace of change is much slower because the lifecycle of analog chips is much longer than say your average smartphone. Even with that slow pace of change, over 25% of LLTC employees work in R&D and every year the Company invests nearly 20% of its sales back into R&D. It’s a profitable business as well, with margins averaging over 40% across the 7,500 products that LLTC produces. Here’s a look at their basic financials:
So while revenues appear to be growing slowly, LLTC has managed to retire all of their debt and now they’re accumulating cash at a steady rate. Their dividend growth rate hasn’t been that impressive frankly, but it seems to be accelerating lately as seen below:
The last dividend increase late last year was +6.66% so we’d except to see another raise in Q4 of this year according to their track record.
LLTC is in a slow moving area of chip making that avoids the latest trends such as smart phones or computers. The Company’s bookings in the Industrial, Automotive, Communication infrastructure, and Military end-markets made up 88% of their bookings in fiscal year 2015. LLTC is in a relatively slow moving industry, yet they still commit significant amounts of money to R&D in order to make sure they stay ahead of the pack. We’re excited about the position we’re going to start building in LLTC, but we’d be even more excited to see an investor presentation in the near future. That way we don’t have to dig through LLTC’s SEC filings for our next article on this very interesting little technology company.