Sunday, November 18, 2007

Altera (ALTR) Valuation

Altera (ALTR) makes programmable logic devices (PLDs). Before doing a valuation of this company's stock price, I need to remind myself about numbers. Numbers sometimes hypnotize tech guys and gals. Stock prices are about the future, so unless you are doing quick, in-and-out momentum trading or some similar strategy, you need to be careful with numbers. The future of a technology company, and hence its stock price, is tied to how broadly its technology will be adapted in the future, and how well it can shift to new technologies when they become the future.

If you don't know about PLDs and their variations known as CPLDs and FPGAs, check out my Altera, FPGAs and FPGAs blog entry from March.

I tend to go with the future of PLDs is rosy theory, but keep in mind that does not mean every PLD maker will be successful. With that caveat in mind, let's look at recent Altera numbers and trends.

Altera's last reported numbers were for Q3 2007. Revenues were $$315.8 million, down 1% from $319.7 million in Q2 and down 7% from year-earlier $341.2 million.

That is pretty grim, and net income was $69.0 million, down 14% sequentially from $80.5 million and down 21% from $87.4 million year-earlier. Not good, but here's what is good: even in a slump the company has enough profit margins in its products to earn investors substantial net income.

Because Altera is not a rapidly growing company, you can buy its stock at a pretty fair Price-to-earnings ration (PE). It closed Friday, November 17, 2007 at $18.90 per share, giving the company a market capitalization of $6.5 billion. Using Q3 net income, annualizing by multiplying by 4 we get $276 million. Dividing that into market cap we get a current PE of 23.6. Inverting that we get a rate of return of 4.2%.

There are worse things than a rate of return of 4.2%, but it is not exactly an encouraging number. Nor does Altera management see a quick turn around. They expect Q4 2007 revenues to be sequentially flat to down 4%.

Maybe this is a bad year because of macroeconomic uncertainty, but there is going to be macroeconomic uncertainty in 2008 too. I suspect inventories are lean at this point, so a pick up in demand could cause customers to up their inventories as well. I think PLDs have a good future because they can cost less than ASICs for smaller production runs, which means the when a technology needs to be updated frequently PLDs are the way to go.

Still, at this stock price, for my portfolio needs, Altera is in the upper end of the fairly valued range. It is a safe, well run, profitable performer, but my local Credit Union will give me more return on my money with much less risk.

But I'll keep an eye on the stock. If it goes below its 52-week low of $18.47, based just on a general stock-market drop rather than on any negative Altera news, I could see picking some up. These are some real smart people at Altera trying to figure out how to sell some new designs they are introducing.

I have never owned Altera or a direct competitor, but I own other makers of semiconductor chips.

More data:

My Altera page (with links to my summaries of Altera analyst conferences)

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