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Our earnings preview for Altera Corporation (ALTR) said “valuation is rich but looks set up to beat on earnings.” The company beat on earnings, and judging from after-hours trading the valuation is getting richer.

Altera Announces First Quarter Results: Financial News - Yahoo! Finance

Altera Corporation [(ALTR - News)] today announced first quarter 2007 sales of $304.9 million, down 4 percent from the fourth quarter of 2006 and up 4 percent from the first quarter of 2006.First quarter 2007 net income was $75.1 million, $0.21 per diluted share, compared with net income of $58.7 million, $0.16 per diluted share, in the first quarter of 2006.

Consensus estimates called for $0.20 in EPS on $311 million in sales. Another top-line miss, bottom-line beat. The guidance for a 1%-4% sequential revenue increase implies $308-$317 million in sales next quarter, well below the $324 million consensus. It also looked to us like the EPS guidance for next quarter would be below estimates due to higher spending on research and development.

Looking further down the financial statements, it was very difficult to understand the market’s enthusiasm. Inventories were up 6% sequentially despite a sequential sales decline and the slower expected growth next quarter. Accounts receivable soared nearly 40%, which suggests three possible scenarios:

1. Sales picked up late in the quarter and will continue to be strong (not supported by guidance)
2. Sales picked up late in the quarter due to aggressive pricing/channel stuffing
3. Sales were made to customers who are less able to pay

The positive scenario seems to us least likely of the three due to the incongruity with guidance. While there may be many other plausible scenarios, we don’t like the rising receivables/declining sales combination regardless of the explanation.

ALTR 1-yr chart

ALTR

Source: Altera's Q1 Results: The Market's Enthusiasm Was Difficult to Understand