Altera (ALTR) Downgraded to Neutral

We recently downgraded our recommendation to Neutral from Outperform for chipmaker Altera Corporation (ALTR).

Altera recently updated its sales guidance for the third quarter of 2011. It now expects third quarter sales to be down 3% to up 1% on a sequential basis, compared to the previous sales guidance of up 2% to 6%.

Management stated that the downgrade in guidance was due to weaker demand in several vertical markets including Telecom and Wireless (particularly outside Asia). In addition, Industrial Automation, Military, and Test were also weak as customers are moderating their purchases in light of macroeconomic uncertainty and other near- term changes to their business environment. On a positive note, Altera expects sales from new products to be up sequentially.

The new guidance implies sales between $531.9 million-$553.9 million, compared to the previous guidance of $559.3 million–$581.3 million.

Consequently, twenty out of the twenty-one analysts covering the stock have reduced their earnings estimates for fiscal 2011 and the third quarter in the last thirty days. The current Zacks Consensus Estimate for fiscal 2011 is $2.52, down by $0.10 in the last thirty days.

For the third quarter, the current Zacks Consensus Estimate is $0.59, down by $0.05 in the last thirty days.

On the last earnings call, Altera guided gross margin between 69% – 70% in the third quarter, down from the second quarter due to vertical market mix. Altera, which competes with Xilinx, Inc. (XLNX) expects gross margin to recover in the fourth quarter.

Earlier, Altera reported sales of $548.4 million in the second quarter of 2011, up 17% from a year-ago and up 2% sequentially. Net income came in at $214.6 million or $0.65 per diluted share in the quarter, compared with a net income of $224.1 million or $0.68 in the first quarter of 2011 and net income of $180.6 million or $0.58 in the second quarter of 2010. The reported figure beat the Zacks Consensus Estimate by a penny.

In view of the macro economic weakness, we have downgraded our recommendation to Neutral from Outperform. Our Neutral recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold.

Xilinx, Inc. (XLNX): Free Stock Analysis Report

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