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Why Xilinx Should Get Even Better Going Forward

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Chipmaker Xilinx (NASDAQ: XLNX  ) was looking well-positioned to benefit from an uptick in telecom and networking infrastructure spending when 2013 began, and the company has indeed delivered so far. Xilinx has appreciated more than 30% this year, driven by solid product-development moves and the aggressive rollout of faster networks and data centers across the globe.

The company has duly rewarded shareholders as well. It has raised its dividend by around 15% over the past year and currently pays a dividend yielding 2.1%. Xilinx's chips are used across diversified markets such as communications, industrial, aerospace and defense, automotive, etc., and since most of these markets have been doing well, Xilinx has been on a roll.

So, when the company reports its second-quarter results on Oct. 16, investors can expect yet another round of solid performance. Xilinx is poised to at least meet analyst estimates of earnings of $0.53 per share on revenue of $588 million. That's because the estimates are well within the range of the company's own guidance that it had issued last time. 

Catalysts on the horizon, namely China Mobile
Considering the developments in the telecom industry and other end markets, Xilinx's outlook might once again exceed expectations. On the last conference call, Xilinx management said it had "begun to see increased activity associated with the China Mobile and China Telecom LTE deployments..." Xilinx expects increased revenue from the December quarter on, driven by LTE deployments in China. 

China presents a big opportunity for telco industry players as China Mobile (NYSE: CHL  ) builds its TD-LTE network by rolling out 207,000 base stations across 31 provinces. The world's largest telecom company is poised to increase its capital expenditure by around 50% this year to $30.5 billion, according to China Daily. China Mobile recently awarded initial contracts worth $3.2 billion and as deployment gathers pace, Xilinx stands to gain.

The industrial, aerospace, and defense business -- accounting for 37% of revenue -- might get better as well. The industrial market has witnessed stable growth this year, and the Manufacturers Alliance for Productivity and Innovation, or MAPI, estimates manufacturing production will improve 2.2% in 2013. Moreover, MAPI projects that manufacturing production will improve by a single percentage point in 2014 and 2015 as well. 

Moreover, Xilinx had itself guided for an improvement in the industrial, aerospace and defense business in the second quarter.

Product development moves, and Altera's threat
Xilinx's innovations have been driving its growth and its 28-nanometer, 40-nanometer, and 45-nanometer chip families have gained traction. The company witnessed a 75% jump in sales of new products in the previous quarter, and it isn't stopping just yet. Xilinx is looking to go one step further by developing the semiconductor industry's first 20-nanometer device along with the first 20-nanometer programmable logic device. 

These products have already been taped out, which means that the final design has been sent for manufacturing, and could help Xilinx land even more customers in the future. However, Xilinx's rival Altera (UNKNOWN: ALTR.DL  ) is looking to go one step further.

Altera is partnering with chip giant Intel to make chips using the 14-nanometer platform. Altera had selected Intel as its foundry partner earlier this year. The company plans to capture around 50% of the industry's revenue through its 14-nanometer process in the next five years.  In addition, Altera is developing its 20-nanometer platform as well, and it is already in talks with potential customers so that its first 20-nm chip gains some traction when launched. 

Final words
But then, Xilinx's wide range of products and the presence of illustrious clients such as Huawei, ZTE, Ericsson, and Cisco put the company in a strong position to benefit from growth in the telecom industry. Also, despite recording decent gains so far this year, Xilinx still trades at 24 times earnings, which is below the industry-average 28 P/E. Looking ahead, analysts expect earnings growth and that's why the forward P/E is even lower at 18.

With more growth expected going forward and the company trading at reasonable valuations, Xilinx still looks like a good bet going into its second-quarter results. For the complete analysis of Xilinx's earnings and additional insight, add the company to your Watchlist by clicking here.

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