Bear of the Day: Altera (ALTR)

Altera Corporation designs, manufactures, and markets a broad range of high-performance, high-density Programmable Logic Devices (PLDs) and associated development tools.

Headquartered in San Jose, California, Altera combines the programmable logic technology (originally invented in 1983) with software tools and intellectual property to provide high-value programmable solutions to over 13,000 customers through direct sales force and distributors.

The company has been publicly traded since 1988 and employs approximately 2,600 employees worldwide.

Altera’s customers are large multi-national corporations as well as small companies in communications, computer and storage, industrial, and consumer market segments.

Disappointing Fourth Quarter Results

The company reported its fourth quarter results on January 23, 2013. The sales for the quarter were 439.4 million, down 11% from the previous quarter and down 4% from the prior-year quarter.

Fourth quarter net income was$120.8 million or $0.37per diluted share, compared with net income of$157.5 million or$0.49per diluted share, in the previous quarter and$146.6 million or$0.45per diluted share, in the prior-year quarter.

The company said that while the sale of new products was impressive, sales of its older products were soft as a result of the sluggish economy. Further management’s guidance for the current quarter was also disappointing.

The results also indicated that Altera’s share of the PLD market was coming down. As the semiconductor industry and the PLD market have matured, revenue growth in the PLD segment is on the decline.

Agreement with Intel

On February 23, 2013, Altera announced an agreement with Intel to manufacture Altera’s programmable chips on Intel’s 14 nanometer technology. This was a significant move on the part of Intel since so far Intel has manufactured chips for itself but probably decided to change its strategy in view of the shrinking PC market and increased competition.

In my view, the move is positive for Intel as it represents a new source of revenue for the company but not so positive for Altera. It may also result in higher costs for Altera. Further the benefits from the deal, if any will not impact the financials before 2015.

Downward Revisions

12 analysts have revised their estimates for the current quarter downwards in the last 60 days. Current estimates for the first quarter of 2013 stand at $0.34 per share, down from $0.40 per share 60 days ago and $0.43 per share 90 days ago.

The Bottom Line

Considering the weakening demand for Altera’s products and increased competition in the industry coupled with declining margins, we suspect that this stock will remain under pressure in the near-to-medium term.

ALTR is currently a Zacks Rank # 5 (Strong Sell) stock and it also has a longer-term recommendation of “Underperform”. Further, the Zacks Industry rank of 256 (out of 265) also indicates further weakness in the short term.

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