The Value Line Investment Survey

Altera is a major provider of programmable logic devices (PLDs). PLDs are semiconductor chips that can be programmed on-site, a feature that allows customers to speed up research & development cycles and quickly bring new products to market. The company also offers computer-aided engineering, logic development tools to facilitate the design process. Altera’s logic chips are used in a wide array of applications across the communications (43% of sales), industrial (35%), consumer (14%) and computer (8%) sectors.

Given recent share-price and earnings performance, this equity is ranked 1 (Highest) for Timeliness. It is well suited to momentum investors focused on the coming six to 12 months. We project solid long-term sales and net-profit growth. Thus, Altera stock also offers appealing price appreciation potential over the 2011- 2013 investment horizon. Based on our 2008 and 2009 share-net estimates, the issue sports price/earnings multiples of 16.9 and 15.6, respectively, below the historical average of around 31.0.

Positive Momentum

Sales in the latest June quarter rose 13%, year to year, boosted by gains of 27% in North America and 17% in the Asia Pacific region. Sales were up 6% in Europe and down 1% in Japan. Newly designed products, which now comprise 42% of sales, jumped 58%, while mature products declined 8%. Benefiting from a favorable shift in product mix, the gross margin expanded 2.5 percentage points, to 67.1%. Thanks to lowerthan- expected operating expense, net income advanced 22%. Share profit surged upward by 45%, aided by a 15% reduction in shares outstanding.

For the full year 2008, we forecast 46% share-earnings growth, from $0.82 to $1.20, on 12% higher sales. In 2009, both the top and bottom lines may well advance 8% to 9%. In spite of the sluggish macroeconomic environment, we believe that the company will continue to generate solid profit growth. Altera, selling to customers in many different industries, is well diversified. Results from strong sectors are offsetting those of weaker ones. Too, management has successfully improved cost efficiency, thereby lifting the operating margin.

New Products are the Key

The primary driver of Altera’s growth is f ield programmable gate arrays (FPGAs), the sales of which increased 18% in the June interim, and now represent almost three-fourths of the total. Ninety-nanometer (nm) FPGAs account for most of the current sales volume, but newer 65-nanometer devices are largely responsible for the good growth. Notably, the company is on schedule to ship its first 40-nm FPGA later this year. This very small geometry (a nanometer is one-billionth of a meter) makes it possible to design highdensity logic chips with robust performance and low power consumption. For example, the Stratix IV family of FPGAs will have twice the logic density of the older Stratix III version, with up to 13.3 million gates per chip, plus enhanced memory and digital signal processing capabilities. These new offerings augur well for long-term results.

A steady stream of new products is critical for Altera to effectively compete and maintain its sizable global market share. Regular, customer-accepted introductions help the company to weather cyclical fluctuations in the broader economy. To keep up to date with changes in technology, the company invests in research & development a sum equal to 19% to 21% of annual sales. The long-term demand picture for programmable logic chips is quite favorable, in our view.

Lester Ratcliff
Analyst-Specialist