Expectations Low for Altera: A Contrarian Chip Play?

 |  About: Altera Corporation (ALTR)
by: Andrew Horowitz

On February 13, 2007, Altera Corporation (NASDAQ:ALTR) reported 4th quarter 2006 diluted earnings (ex-items) of $0.27 per share. This beat last year’s 4th quarter results by 42.1%. In fact ALTR has consistently beat earnings on a quarterly basis.

The outlook seems to be a bit brighter with earnings growing at a 20% rate through 2008. The current P/E of 23 has the shares valued a bit high (PEG Ratio over 1 - P/E to Growth), yet the company has an aggressive buyback program in place.

In fact, they just increased their share purchase plans and increased the dividend to shareholders. That tells an interesting story of a company looking to enhance shareholder value.


Analysts are not sold on Altera though. Over the past several months, they reduced their estimates and like a typical group of penguins have all moved towards a slowing of earnings growth. The silver lining is that when we see a consistency of estimates with a narrow range of estimates, they usually have it wrong. This is proven by the consistency of Altera’s surprise announcements.

During the past 90 days, 24 revisions have been made down for fiscal 2007 and 14 for 2008. Playing it safe it would seem in light of the fall of companies like Advanced Micro Devices (NASDAQ:AMD) and the general dissatisfaction with the tech industry (Motorola (MOT), Dell (NASDAQ:DELL) and IBM (NYSE:IBM)). Once again, this could be a beautiful setup for a reversal of course. There must be something that management knows if they are buying millions of dollars of their stock. It is either that they are looking to guard against a potential buyout or they believe that the stock is the best use of the money they have available; Better than issuing bonds, adding to manufacturing capacity or even R&D.


Now to focus in on the Technicals. The chart shows an interesting story. Consistently making higher lows and hitting resistance levels. The MACD is breaking towards the upside and the Money Flow is moving to a stronger position. Finally, the last few days have seen a nice move up in the price of shares as we near the earnings announcement. Either that means that there is a few leaks or the beginning of short-sellers moving out, not wanting to get stuck if the earnings come out stronger than expected.

Disclosure: none