Another one of those tech sector weather vanes is set to report earnings Thursday night. This time it's circuit design tools maker Mentor Graphics (NASDAQ:MENT), coming at you out of Oregon with a first-quarter report.

What analysts say:

  • Buy, sell, or waffle? Ten analysts track Mentor. Their buy, hold, and sell ratings are split four, three, and three. In our Motley Fool CAPS investor community, this former four-star stock has been stuck with a single star for three months, based on input from 34 players.
  • Revenues. The consensus points to $187 million, in line with the official guidance. Keeping in mind that the company shifted its fiscal year by a month over the winter, Mentor produced $176 million in sales in the closest comparable period last year.
  • Earnings. The average forecast calls for $0.10 of profit per share, up from $0.08 in the closest year-ago period, ended March 31, 2006. That's the top end of management guidance, too.

What management does:
Rising gross margins usually signal strong customer demand and pricing power, and the even better operating margin trend points to tighter operations in general. Here at the Fool, we certainly like to see cash flows greater than net income numbers, because that's a sign of conservative accounting measures, and there's not much to complain about when it comes to recent revenue growth. More on that below.

Margins

9/2005

12/2005

3/2006

6/2006

9/2006

12/2006

Gross

85.9%

86.4%

86.7%

87.2%

87.3%

87.5%

Operating

3.1%

4.8%

6.0%

9.1%

9.6%

9.5%

Net

0.7%

0.8%

0.6%

1.4%

1.7%

3.4%

FCF/Revenue

0.7%

2.6%

4.3%

6.7%

6.0%

6.3%

YOY Growth

9/2005

12/2005

3/2006

6/2006

9/2006

12/2006

Revenue

0.1%

-0.8%

0.9%

6.4%

9.7%

12.2%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Mentor sells its electronics design tools to heavyweights like IBM (NYSE:IBM), Sun Microsystems (NASDAQ:SUNW), and Panasonic (NYSE:MC), as well as to semiconductor foundries like Taiwan Semiconductor (NYSE:TSM) and United Microelectronics (NYSE:UMC). Because of Mentor's place in the food chain, its results can clue us in on what these bellwethers think about the near future in semiconductors and electronics: They buy testing and design equipment a couple of quarters ahead of putting them to use.

If the sales trend here is any indication, it looks like Texas Instruments (NYSE:TXN) and friends really mean it when they say that the sector-wide slump is coming to an end.

As for Mentor itself, that combination of fatter margins, faster growth, and bulging back order lists looks very healthy -- at least until the manufacturing industry optimism wanes again. For that reason, I prefer using Mentor as a testing tool, rather than actually buying its shares. You get more advance notice that way.

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Fool contributor Anders Bylund owns shares in Taiwan Semiconductor but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure can track the weather for you.