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A Valuation of Linear Technology Corporation’s Share Price

Linear Technology Corporation (LTC) designs, manufactures and markets a broad line of analog integrated circuits. The last trade price of LTC’s stock was $30. 14 (November 27, 2007). The analysis herein projects a $42. 28 intrinsic value for LTC’s stock by the end of Fiscal Year (FY) 2008 (Exhibit 1). The market’s low valuation of LTC’s share price, combined with favorable macro economic trends provides an excellent investment opportunity.

Thesis: LTC reported FY 2008 first-quarter EPS of $0.40, which was up 9% year-over-year and $0. 02 above the market expectation. Revenue of $281. 5 million increased 5% sequentially but decreased 4% year-over-year. I estimate LTC’s revenue and EPS for FY 2008 will reach $1. 24 billion and $1. 82 respectively, i. e. revenue will grow 14. 6% and EPS will grow 31. 1%, sequentially (Exhibits 2 through 5). The global semiconductors market grew by 8. 8% in 2006 and is expected to grow at an average-annual-rate of 7. 7% by year 2010 (Exhibit 6).

Sustained growth of the entire markets will translate into strong top line growth for LTC. Mobile phone sales are expected to be around 1. 2billion units a year in 2008 as they become the most common consumer electronics

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device (Exhibit 7). LTC manufacturers many cell phones inputs including mixers, modulators, demodulators, amplifiers, drivers, and power detectors and controllers. The company’s products enjoy a good reputation of supporting various multimedia platforms, thus being well positioned for the future of the mobile phone market.

With the global demand for mobile phones forecasted to grow astronomically, LTC should be able to leverage its strong market position and product portfolio to drive its revenue growth1. The company is a leader in the emerging Power over Ethernet (PoE) market. The growth in PoE is expected to be fueled by increasing adoption of VoIP, the proliferation of wireless local-area networks, and the increased use of security cameras. Sales of PoE ports are expected to grow at a Compound-Annual-Growth-Rate (CAGR) of 54%2 through 2008, as deployment advantages including cost, space savings, and flexibility take hold.

Again, LTC would benefits directly from the growing PoE market. LTC’s products have a variety of applications including the integration of Liquid Crystal Display (LCD). Just as the case with mobile phones, global demand for LCDs is growing at a fast pace. Demand for LCD TVs surged over 150% in 2006. Sales volume of LCD TVs is expected to grow 20% in 2008 as compared to 2007 (Exhibit 8). With the upturn in the LCD market, a spur in the demand for LTC products is anticipated.

Lastly, the strong demand trend for PCs (estimated growth of 12% in 2007 and 11. 1% in 20083), the expanding automotive electronics market (estimate 8% CAGR through 20104) and the rapid evolution of industrial equipment sector (estimated 10% growth in 20085) toward higher precision and increasing portability would boost LTC’s sales as well. My interview with one of LTC’s key distributors6 and OEM clients7 confirmed my revenue and growth forecast for communications and computer segments.

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