Programmable-chip maker Altera (NASDAQ:ALTR) will report third-quarter financial results tomorrow. Perhaps investors ought to reprogram their expectations.

What analysts say:

  • Buy, sell, or waffle? Of the 22 analysts covering Altera, 13 consider it a hold, eight say buy, and only one analyst says sell.
  • Revenue. Sales are expected to decline nearly 5% for the quarter, falling to $325.2 million.
  • Earnings. Profits, however, are expected to fall around 30% to $0.19 a share.

What management says:
Last month, management reiterated its guidance for the quarter, saying that revenue would indeed come within its previous forecast of flat to 3% growth. That suggests a top end of approximately $329.3 million. Altera believes "the company's new product category is showing growth in comparison to the similar period in the prior quarter." It didn't comment on earnings, so maybe the analysts have it right, which may be troublesome.

What management does:
Altera and rival Xilinx (NASDAQ:XLNX), have cornered more than 80% of the programmable-chip market, and the former has benefited from increasing margins of late. That may have more to do with Taiwan Semiconductor's (NYSE:TSM) manufacturing processes increasing yields even as rising inventory was a concern earlier this year. Since it outsources its manufacturing, Altera has an edge over Xilinx in capex and depreciation expenses.

Margin

06/06

09/06

12/06

03/07

06/07

Gross

65.6%

66.7%

66.6%

66.3%

65.9%

Operating

24.1%

23.8%

23.3%

24.1%

24.0%

Net

23.6%

23.4%

25.1%

26.2%

26.7%

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:
Sales at the chip maker have eased of late, and margins are starting to feel the pinch. Shares pay a 0.3% dividend and trade at a premium to Xilinx, which has a far higher yield of 1.8%. Still, a previously announced $1 billion share buyback to be completed between the second half of 2007 and the first half of 2008 will receive a boost from a new credit facility Altera entered into. The company will use $500 million of the proceeds, buying back as much as $1.5 billion in shares during the time period.

Although Intel (NASDAQ:INTC) has wowed us with increased chip sales from higher PC demand, Altera sits only about 11% off its 52-week high, so we might want to wait for it to return to Earth a bit more before staking our claim.

Related Foolishness:

Altera has earned a three-star rating from the 70,000-strong investor intelligence community at Motley Fool CAPS. You can add your voice to the stock-rating service by joining today. It's free!

Intel is a Motley Fool Inside Value pick. Try this market-beating publication free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.