Altera Growing As Peers Stumble

10/18/2010


  Recent Price
$30
  Dividend
$0.24
  Yield

0.8%

  P/E Ratio
19
  Shares (millions)
311
  Long-Term Debt as % of Capital
24%
  52-Week Price Range
$30.97 - $19.23

In early September, Altera ($30; ALTR) raised its revenue target for the September quarter, projecting growth of 10% to 14%. In boosting its guidance for the second time since July, Altera cited broad growth, especially in the telecommunications and wireless markets.

Altera’s announcement coincided with bearish sentiment sweeping over the technology industry. Analysts and semiconductor companies alike cut projections because of rising inventories and slowdowns in end markets, particularly personal computers (PCs).

Altera is partially sheltered from the weakening PC environment because of its diverse business mix. The company’s semiconductors power everything from routers and cable set-top boxes to navigation systems in cars and medical-imaging and diagnostic systems. Altera is also a major player in telecommunications infrastructure and stands to benefit from third-generation networks being built in emerging markets, particularly in China and India. Altera is a Buy and a Long-Term Buy.

Business breakdown

Altera supplies semiconductors to end markets in four categories: telecommunication and wireless (41% of revenue in the last four quarters); industrial, military, and automobiles (23%); networking, computer, and storage (14%); and other, which includes medical and consumer (22%). In the first six months of 2010, all four business units reported at least 40% revenue growth. New products generated 35% of Altera’s revenue in the June quarter, a credit to the company’s research and development spending, which accounted for 22% of sales in 2009.

Key to Altera’s growth is a type of semiconductor called a programmable logic device (PLD). Altera ships PLDs blank, then clients program the microchips to fit their customized demands. PLDs have relatively low up-front development costs and shorter design cycles, meaning Altera can get them to market faster than traditional chips.

Altera has carved out a 35% share of the PLD market. High barriers to entry limit future competition in a market dominated by Altera and Xilinx ($27; XLNX). Given the PLD’s longer life cycle — typically 10 to 20 years — clients prefer to buy from established and stable firms. PLD sales should grow faster than the overall semiconductor industry over the next five years.

Strong growth

Altera stopped buying back its shares last year, but net cash holdings of $1.57 billion ($5 per share) and strong free-cash-flow growth provide plenty of flexibility for future purchases. With a market value of about $9 billion, Altera could attract takeover interest, especially now that Oracle ($28; ORCL) has begun to shop for a chipmaker. But Altera, with a Quadrix® Overall score of 99, stands out on its own merits.

Rising analyst estimates project per-share earnings of $2.35 this year, up 180%. For 2011, Wall Street expects a 3% profit decline, a conservative target considering Altera’s operating momentum. Altera is slated to release September-quarter results Oct. 19. An annual report for Altera Corp. is available at 101 Innovation Drive, San Jose, CA 95134; (408) 544-7000; www.altera.com.

ALTERA
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '10 $0.58 vs. $0.16 + 68% $27.48 -

$21.97

23 - 18
Mar '10 0.50 vs. 0.15 + 52% 25.75 - 20.89 31 - 25
Dec '09 0.34 vs. 0.28 + 16% 23.18 - 19.23 30 - 25
Sep '09 0.19 vs.

0.31

- 20% 21.41 - 15.32 24 - 17
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $1.20 $0.84 $0.20 $23.18
-
$13.92 28 - 17
2008 $1.37 $1.18 $0.19 24.19
-
12.99 21 - 11
2007 $1.26 $0.82 $0.12 26.24
-
18.00 32 - 22
2006 $1.29 $0.88 $0.00 22.29
-
15.54 25 - 18
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
99 100 60 98 95 100 77

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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