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Altera Improves, Stays a Buy

Altera Corporation (ALTR) reported revenues of $360 million in Q2:FY2008, exceeding our estimate of $347 million, mainly due to growth in sales of new products. EPS of $0.32 beat our estimate of $0.26 and street consensus of $0.27.

Gross margin improved to 67.1% from 65.1% generated in the previous quarter, mainly due to a reduction in material and logistics costs as well as sales strength from the Communication and Industrial end markets, which usually carry higher margins. Going forward, third quarter is a seasonally slow quarter for the company and management expects total revenue to remain flat or decline by 3% on a sequential basis. We have adjusted our FY2008 estimates and maintain our Buy rating.

The primary theme to watch at Altera over the next 6-12 months is new product introductions and technology migrations. Altera is only beginning to ramp up 65nm products at the moment, with the Cyclone III product line now completely rolled out and contributing $1.5 million to FX revenues and Stratix III beginning to ramp up design wins at a good pace. Without a doubt, these product introductions will contribute nicely to sales growth in FY2008.

However, the highlight of the year will be the fact that in close partnership with foundry services supplier TSMC, Altera also will begin rolling out this year its first 45nm products. New products continue with a strong sequential growth pattern. New Products revenues (40% of sales) continued to grow in the quarter, posting 13% sequential growth in Q2 following 14% sequential growth in Q1.

The stock is currently trading at 18.1 times our revised 2008 earnings estimate. We think inventory is being worked down and expect revenue growth to speed up by Q4:FY08. However, the company's shares appear appropriately valued for the investor at the current time. We are raising our target price to $25, which is derived by applying a target P/E multiple of 21.0x to our fiscal year 2008 EPS estimate.

Brasil Telecom Still Impressive

We are keeping our current Buy recommendation on Brasil Telecom (BRP). The company posted better-than-expected results in the second quarter of 2008, and the short-term outlook remains positive. The company also has solid cash flow, decent operating margins in the wireline business, and an attractive valuation.

Moreover, the growth in the wireless and the broadband segments are encouraging and should continue in future quarters. The economic environment in Brazil remains positive, despite the continued rate hikes and threat of worldwide inflation.