1 Solid Semiconductor Stock That You Shouldn’t Miss

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Programmable chip maker Xilinx (NASDAQ: XLNX) didn’t exactly set the Street on fire with its third-quarter earnings report, but it did provide some positive cues for the rest of the year. The company’s revenue of $509.8 million in the quarter was flat from the year-ago period, though wide off the $527.7 million mark set by analysts. However, earnings of $0.38 beat estimates by a penny, resulting in a mixed quarterly performance.

A brief review

In addition, the company’s outlook for the current quarter isn’t too great either. Xilinx expects revenue between $520 million and $540 million, while the Street calls for $545 million. However, investor reaction hasn’t been acidic as one would expect after such results and outlook, as the stock gained 2% after earnings.

Surprised at the positive investor sentiment? Well, don’t be, since Xilinx has a lot of firepower to deliver improved results over the long run and there were some positive takeaways from its latest report. The company’s leading position in 28nm chips has been driving sales of its new products at a fast clip. Sales of its new products jumped an impressive 17% sequentially, propelled by a 20% jump in sales of 28nm chips, which once again exceeded targets.

Attention! Catalysts ahead

Xilinx boasts of the largest portfolio of 28-nanometer chips in the industry and this should help it to gain from build out of infrastructure for faster networks and data centers. Carrier spending is expected to increase this year along with data center spending.

Positive cues started emerging late last year when AT&T (NYSE: T) signaled its intention of being aggressive in rolling out faster networks. The carrier’s decision to accelerate its 4G roll out and upgrading its wireless and wireline networks might spur others into action as well, since they might not want to be left behind in the 4G race.

Also, it seems that a positive spending environment is rubbing off onto Xilinx as well. The company expects its communications business to improve in the current quarter after it declined 11% in the previous one. Also, with an expected 4.5% jump in data center spending on the way this year according to Gartner, Xilinx might well expect some more revenue from its Cisco (NASDAQ: CSCO) account.

Cisco’s data center business is witnessing solid growth, jumping 61% in the previous quarter. Moreover, it is expected that the market for data center infrastructure would be worth in excess of $150 billion in the next four years. Hence, there’s still a lot of growth lying ahead for Cisco, and in turn Xilinx, as far as its communications and data center business, which accounts for almost half of total revenue, is concerned.

Marching forward

But Xilinx doesn’t expect improvements in its end businesses to stop here, as it ended the quarter with a better backlog on a sequential basis. The company’s Industrial, Aerospace & Defense business, which accounts for 36% of total revenue, has been improving and further upswing is expected in the current quarter.

Moreover, the company’s leading 28nm portfolio is once again expected to do well in the current quarter. Xilinx’s wide range of offerings should enable the company to continue the sales momentum of its new products.

But, top line growth isn’t the only positive about Xilinx. The company has a solid track record of managing costs well, and turned in a record gross margin of 66.6% in the previous quarter. Xilinx is focused on expanding gross margins across new products and this should reap rewards as sales of these products improve.

Goodies all the way

All these points indicate that a bright future is in the offing for Xilinx, and potential investors won’t have to pay a fortune to buy the stock either. Xilinx’s trailing price-to-earnings multiple of 21 times is almost at par with the industry average, while a forward P/E of 19 times tells us that there’s further growth in the future. Also, the stock carries a healthy dividend yield of 2.4%, which makes it an even better investment proposition.

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