Semiconductors have been on a sharp rise for the year to date. Top gainers include Altera (NASDAQ:ALTR), Xilinx (NASDAQ:XLNX), and Intel (NASDAQ:INTC). Of the three, the Street is only bullish on one: Altera. Based on my review of the multiples and fundamentals, I find limited upside for all three firms but a strong defensive play at Intel.
From a multiples perspective, Intel is by far the cheapest. It trades at a respective 11.2x and 10.3x past and forward earnings with the highest dividend yield at 3.1%. While Altera and Xilinx are trading near their historical multiples, Intel's current PE multiple is 65% of the 5-year average. The combination of mutliples being below historical levels and a leading industry dividend yield renders Intel a defensive play. Altera and Xilinx both trade around 17.5x past earnings. With a free cash flow yield of only 6.4% for the former, I see little room for appreciation.
At the fourth quarter earnings call, Altera's CEO, John Daane, noted a challenging outlook for the top-line:
"Fourth quarter revenue deceleration was caused by broad end market inventory reduction, coupled with slowdowns in a few markets such as Wireless and test. As expected, Military grew significantly in the quarter and Computer Storage declined due to the end of the earthquake-related ASIC replacement business.
For first quarter revenue, we are forecasting a 5% to 9% sequential decline, with program timing in Military contributing to slightly more than half of the decrease measured to the midpoint. Wireless should also be down across multiple geographies due to continued inventory depletion aftermarket softening in the second half of 2011."
Over the last two years, Altera has done a strong job in catching up on its competitor, Xilnix. Altera has realized greater efficiency, as evidenced by its higher margin, and has delivered significant top-line momentum. Even still, this trend is likely to reverse as spending is reduced from wireless clients. The main attractive offering from Altera is its "structured ASICs" solutions, which take the best of both worlds for programmed logic devices (PLDs) and ASICs. The packages helps build loyalty to lock in market share.
Consensus estimates for Altera's EPS forecast that it will decline by 22.6% to $1.82 in 2012 and then grow by 23.1% and 19.6% in the following two years. Assuming a multiple of 18.5x and a conservative 2013 EPS of $2.19, the rough intrinsic value of the stock is $40.51.
Turning over to Xilinx, we find a company well positioned to benefit from the build out of 3G and 4G networks in India and other emerging markets. As the largest semiconductor producer of its kind, Xilinx supports its market rank through a leading R&D program and high switching costs for customers. Thus far, PLDs are attractive for lower-volume platforms due to their higher per unit cost. With the costs decreasing, PLDs are expected to take away share from the less flexible ASICs.
Consensus estimates for Xilinx's EPS forecast that it will decline by 20.1% to $1.91 in 2012 and then grow by 5.8% and 16.8% in the following two years. Of the 29 revisions to revisions, all but one have gone up for a net change of 9%. Assuming a multiple of 18.5x and a conservative 2013 EPS of $1.96, the rough intrinsic value of the stock is $32.66.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.