Altera: The Numbers Say Buy

| About: Altera Corporation (ALTR)

Altera (NASDAQ:ALTR) is a designer and manufacturer of programmable logic devices. The company has a current share price of $39.72, with a 52-week range between $30.39 and $49.59. Altera has done well in the semiconductor industry, and in this article I'm going to analyze the numbers and determine if this company is worth investing in.

Altera has had healthy growth over the past ten years. Revenue, net income, and EPS have all been positive and have had an overall increasing trend. If we take a look at the table below, we can see that those metrics have gradually increased over the past ten years. As of late, however, growth in the three areas has seen a substantial increase.

Growth 10 year 5 year 1 year
Revenue 4% 12% 63%
Net Income 5% 23% 185%
EPS 8% 27% 196%

The margins and returns show how profitable of a company Altera is. Not only are the profitability metrics some of the highest in the industry, but Altera has had a history of putting up strong numbers. Below I've compared the company with their largest competitor, Xilinx (NASDAQ:XLNX). Both companies have a similar share price of under $40, but Xilinx is considered the larger company of the two.

Profitability ALTR XLNX
Net Margin 40% 25%
Gross Margin 71% 0%
Operating Margin 44% -2%
ROE 36% 24%
ROA 22% 14%
ROIC 27% 17%

Given the two tables above, you can see that Altera is a healthy and profitable company. As we look at the valuations of the firm, we can see that two out of the three valuation metrics are under the five year average. Altera has a P/E ratio of 15.2 with an average of 18.7, a P/B ratio of 4.5 with an average of 5.7, and a P/S ratio of 6 with an average of 5.2. Two metrics suggest that the company is undervalued, while one suggests it is overvalued. Let's look at the intrinsic value in order to determine if the company has any upside.

Altera has had an average growth rate of about 15% of free cash flow during the past ten years. By extending FCF out for the next ten years and using a growth rate of 10% and a discount rate of 10% and 13%, I've determined that the intrinsic value for Altera is between $47.19 and $70.60 per share. I decided to use a conservative 10% growth rate because, although FCF has been increasing overall, it hasn't been rising steadily year to year. I used the discount rates of 10% and 13% because of the solid track record that the company has had over the past ten years. Based off of the intrinsic value, Altera is undervalued and has upside as low as about 19% and as high as about 78%.

Altera seems to be an attractive company at $39.72 per share. The firm is seeing strong growth currently in revenue, net income, and EPS. The company is highly profitable, with margins and returns as high as any in the industry. The valuations and intrinsic value show that the company is undervalued. At the very least, there is about a 19% upside to the firm. Based on the numbers, Altera seems to be a great buying opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.