Wait for This Company's Turnaround Before Buying It

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Altera (NASDAQ: ALTR) is primarily engaged in developing programmable logic devices (PLD). The PLD’s that the company manufactures are programmable, as compared to (application-specific integrated circuit) ASIC devices, which can perform only one given function for which they were designed. Upfront costs of ASICs are pretty high, so this has helped Altera gradually take away market share from ASIC-based systems.

Altera recently posted its 2Q 2013 results, which were in line with consensus estimates. How did it perform and how does its future look? Let us find out.

Quarterly performance

On an end-market basis, telecom and wireless declined 16%, networking, computer and storage decreased 6% and the other category declined 8% on a year-over-year basis. The overall result was that Altera reported total revenue of $421.8 million, which declined 9.3% from the year-ago quarter but rose sequentially by 2.7%. This missed the consensus estimates of $425 million. The decline was primarily due to weakness in the markets mentioned above. But the automotive, industrial and defense segments did provide some cushion to the top line.

Reported net income was $101.5 million or $0.31 per share, compared with $162.7 million or $0.50 per share in the year-ago quarter. Overall, it was a weak performance on a year-over-year basis, but sequential performance provided some optimism as it indicated a turnaround in the upcoming quarters.

Going forward

Altera’s decision to use chip-maker Intel (NASDAQ: INTC) for manufacturing programmable chips, among other things, will enable it to stay ahead of its competitors. If Intel possesses the sort of edge that many experts believe it has with next-gen fabrication, then this could be a noteworthy facilitator in allowing Altera to gain back some market share from Xilinx (NASDAQ: XLNX).

With a slowdown in the PC market coupled with slow progress in the mobile-computing segment, moving into the foundry business for Intel was a logical choice in order to utilize the excess capacity in its production lines. Altera's 14 nanometer chip line is a big win for Intel and in the future, Intel can also hope to compete against Taiwan SemiconductorHowever, many experts feel that the foundry business will not have a meaningful impact on Intel's fundamentals for two-to-three years. The long-term prospects, however, look good.

The worldwide semiconductor-foundry industry was worth approximately $34.5 billion in 2012 and this represented growth of 16.2% over the previous year, as per Gartner. It is estimated that the semiconductor-foundry business would grow at an annual rate of 19.7% over the period 2012 through 2016. This presents a substantial opportunity for Intel to cash in, given that it is moving into the foundry business and has also gained orders from Altera.

Altera also announced its Arria 10 product for 20 nanometer chips. The new Arria 10 line, made with 20 nanometer process technology of Taiwan Semiconductor, will be packed with dual-core ARM Cortex A9s running up to 1.5 GHz, being twice as fast as its nearest competitor. Its chips made in 20 nanometer with finer processes are also anticipated to have a premium price tag, which should provide margin improvements.

Earlier this year, Altera acquired Tpack and Enpirion. The Enpirion deal enabled Altera to move into power-management solutions, thereby expanding the opportunities and market segments in terms of products/services offerings.

The PLD market is a good place to be, but the segment hasn’t grown at the pace at which it was estimated to expand. However, with Altera and Xilinx controlling this market as a virtual duopoly, there is one competitor only for Altera to compete with and this should make a turnaround a bit easier. 

Altera’s arch rival, Xilinx, recently declared impressive 1Q 2014 results, notching revenue of $579 million and adjusted earnings of $0.56 per share, beating consensus estimates on both counts.

Xilinx declared that it saw sequential improvements in all businesses driven by better demand for its 28 nanometer products. Further traction is expected in the ready-to-be-shipped 20 nanometer products. Xilinx also announced its partnership with foundry partner Taiwan Semiconductor for transitioning to 16 nanometer nodes by 2014.

Xilinx has appreciated in the range of 30% this year. It offers a good dividend yield of 2.2% annually. It also has a good order backlog, which was up sequentially. It would not be unreasonable to expect continued growth from Xilinx as a result.

Conclusion

Altera is being significantly hurt by Xilinx at the moment but the company's efforts to turn around cannot be ignored. The partnership with Intel and innovative products based on 14 nanometer and 20 nanometer process technology might enable it to fight Xilinx with more potency in the future. But it would be wise to stay away from Altera right now until and until the signs of a rebound are evident.

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ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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