Foolish Forecast: Silicon Labs

Far from the turmoil surrounding dueling titans AMD (NYSE: AMD) and Intel (Nasdaq: INTC), semiconductor maker Silicon Labs (Nasdaq: SLAB) quietly toils away, generating massive returns for the investors who first learned of it from the Motley Fool Stock Advisor newsletter service. Over the last year, SL has risen 84%. Not quite AMD's 109% jump, but a far cry from Intel's 17% decline as well. Will the good times keep on rolling? Monday's news on SL's first-quarter 2006 results should give us a clue.

What analysts say:

• Buy, sell, or waffle? Fourteen analysts follow SL. Seven of them rate it a hold, while six rate it a buy, and only one, a sell.
• Revenues. Analysts are looking for an 8% rise in quarterly revenues to $112.6 million.
• Earnings. Profits are expected to grow a bit slower, up 7% to $0.32 per share.

What management says:
In its last earnings release, SL credited "robust wireless demand" for helping it turn in results that bested analyst estimates by $0.06 -- or 19%. Mobile handset revenues grew 14%, and are rapidly approaching the point where they constitute half of all revenues generated by SL. Tomorrow's news might mark that turning point, as CEO Necip Sayiner mentioned that he "anticipate[s] continued strength in our wireless business due to strong market demand."

What management does:
If there's bad news to report at SL, it's the serious pressure on its margins; sales stagnated over the last six months (in comparison to the previous year's levels) while operating costs surged.

Margins %	10/04	1/05	4/05	7/05	10/05	12/05
Gross	54.8	54.8	54.6	54.7	54.4	54.4
Op.	26.8	23.4	22.9	20.7	18.1	17.5
Net	18	16.8	16.6	15.6	11	11.2

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
There's a silver (or silicon?) lining around this cloud, however. SL's margins are compressing so rapidly because the company is pouring huge amounts of cash into research and development. Honestly, that's precisely what you want to see high-tech companies doing.

Against stagnant sales, SL has ramped its R&D expenditures by 46%. On Monday, and in future quarters, we'll want to look for signs that this investment is paying off. If sales begin to pick up, and if the company begins talking about stealing market share from its rivals, then I suspect any murmuring about rising operating costs will subside right quick.

Competitors:

• Agere (NYSE: AGR)
• Broadcom (Nasdaq: BRCM)
• Infineon (NYSE: IFX)
• Texas Instruments (NYSE: TXN).

Intel is an Inside Value pick. To find more top-shelf stocks at bargain-bin prices, sign up today for a free 30-day guest pass.

Fool contributor Rich Smith does not own shares of any company named above.