Foolish Feature, 02/11/98: Stocks Fools Love, Linear Technology, by David Forrest

Stocks Fools Love
February 11, 1998

Linear Technology
by David Forrest (TMF Bogey)

Linear Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LLTC)") else Response.Write("(Nasdaq: LLTC)") end if %>
1630 McCarthy Blvd.
Milpitas, CA 95035
http://www.linear-tech.com
$66 3/16 as of February 9, 1998

Love at first sight? If I sent you on a blind date with Linear Technology, you'd be immediately impressed with what you saw. At first glance, Linear Tech is a darling company. From December of 1989 through January of 1998, the average annual return on Linear Technology was 49%. Translated into total return, that's more than 25 times your money. In fact, over the same 9-year period, Intel has only produced 44% annual returns and Texas Instruments only 22%. Simply amazing.

The company is involved in the semiconductor market, which has been a hot market overall for the past decade. Heck, semiconductors are in almost all electronic products, right? So, on the first date, you might be smitten with this wealthy and successful company. However, we all know that true love only comes after really getting to know someone.

Courting -- Researching a company is akin to courting your lover. This is the phase where you really get to know her and decide ultimately if you plan on making a solid commitment to her. When you "research" a potential soul mate, you look for things like whether she leaves the toothpaste uncovered or appreciates the little things you do for her. Well, taking a close look at Linear Tech, we find that this company makes "integrated circuits." Integrated circuits are basically the guts of semiconductors.

There are two general categories of integrated circuits -- digital and analog. Examples of digital circuits are memory chips and microprocessors. Texas Instruments <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TXN)") else Response.Write("(NYSE: TXN)") end if %> is an example of a company that makes memory chips, and Intel Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> is a maker of microprocessors. The major characteristic of a digital circuit is that it processes electricity and turns the electricity "on" and "off" depending on the instructions it receives.

Analog circuits, on the other hand, react to other physical properties such as temperature, sound, pressure, weight, light, and speed. I make this somewhat confusing distinction only because I want to be clear that Linear Technology is not in the "sexy" business that Intel and Texas Instruments are in. You don't hear a lot about Linear Tech, but you always hear about Texas Instruments and Intel. That's another attractive quality in this potential mate -- not a real loudmouth. Quiet excellence.

The company produces circuits for no fewer than 12 industries and no single customer accounts for more than 10% of its business. The bottom line here is that it is very well diversified and has weathered a number of cyclical storms over the past decade, still producing insane returns through all the ups and downs. Linear Technology makes circuits for toasters, mobile phones, televisions, radios, CD players, notebook computers, etc., so you don't have to be worried about its products becoming obsolete.

Pre-nuptial? In real life, pre-nuptial agreements are a slippery slope to climb, but in investing, looking at a company's finances and passing judgement is a must! Hang on to your hats, because here comes the rap sheet:

1. No debt
2. Quick and current ratios above 5.0
3. 71% gross margins
4. 50% operating margins
5. Net profit margins of 36%
6. 12 times sales
7. Inventory turns -- 10 times
8. Return on Equity -- 28%
9. EPS Growth of 37% (5-year average)
10. Market Capitalization -- $5 billion
11. Cash of $500 million -- 10% of market cap.
12. Inventory -- just $12 million.

(For more on the significance of these metrics, please check out "How To Value Stocks.")

The only thing that sounds any alarms here is that the company trades at 12 times sales. The reality is that it has always traded at this price-to-sales valuation or higher. Great companies are almost never "cheap." After looking at the finances, it's clear that the company is rock solid.

Wedding Bells? Only you can make this decision. The fact is that I love this company and think it will continue to be an outstanding performer, with some admittedly bumpy roads to cross over time. Much like life, focusing on the short-term annoyances and not looking at the long-term benefits can be deadly. If you have a long-term perspective and can deal with some wild ebbs and flows, you might just consider hitchin' up with Linear Technology. Good luck, and remember to always do your own homework. I'll leave you with a link to the similarly themed Fribble that I wrote several years ago about selling a stock. Take care.

Next Stock Fools Love: Lucent Technologies

* A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question or representative of anyone or anything else other than that specific Fool's thoughts.