Xilinx Inc (XLNX) designs, develops and markets programmable platforms, like integrated circuits, in North America, Asia Pacific, Europe and Japan. Andreas Halvorsen’s Viking Global, D.E. Shaw’s D E Shaw and Ken Griffin’s Citadel Investment Group were fans of the company at the end of the second quarter. XLNX recently reported third quarter sales of $555.21M, down from $619.67M the same quarter last year. Its diluted net EPS fell from 65 cents the same quarter last year to 47 cents in the third quarter. It recently traded at $32.50, just under analyst targets of $32.96. Most analysts are rating XLNX as a hold for the last couple of months. There is also a fair amount of talk of the company as a possible takeover target. To get an idea whether the company is worth the risk, we are going to take a closer look at the company and similar stocks – Altera Corp (ALTR), NVIDIA Corporation (NVDA) and Linear Technology Corp (LLTC).
P/E RATIO
First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times its earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced, so the lower the better. Of the companies we looked at, NVDA had the lowest forward P/E ratio at 13.35. LLTC was next at 15.88, followed by XLNX at 16.17 and ALTR at 17.22.
VOLATILITY
We used beta as a measure of risk. A beta of 1.0 means that the stock moves with the market. The higher a stock’s beta, generally, the more volatile the stock, and, as a result, the more risky. A lower beta tends to indicate that the stock moves more independently from the market. XLNX has the lowest beta of the companies we looked at. It has a beta of just 1.00. LLTC was next at 1.06, followed by ALTR at 1.16 and NVDA at 1.57.
EARNINGS GROWTH
Next, let’s look at the earnings growth consistency and expectations. Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. XLNX’s earnings grew 20% over the last five years, versus 23.2% for the industry. They are expected to increase 14% over the next five years, compared to 14.5% for its industry. In comparison, NVDA’s earnings grew only 5% over the last five years and are expected to grow by just 16.9% over the next five years. LLTC grew 13% over the last five years and is expected to grow 9.7% over the next five, while ALTR’s earnings grew 26.4% over the last five years and are expected to grow 15.1% over the next five years. ALTR has the strongest earnings growth history and estimates of the companies we looked at.
HEDGE FUND OWNERSHIP
Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. Of the companies we looked at, NVDA was the most popular. Of the 300+ hedge funds we track, 24 had positions in at the end of the second quarter. ALTR was next at 22, followed by XLNX at 14 and LLTC at 12.
THE BOTTOM LINE
We like NVDA best. It has the best earnings growth potential, highest hedge fund interest and the lowest PE multiple. NVDA is a volatile stock but we think its lower price multiple and higher growth potential compensates for that. XLNX’s PE multiple is 20% higher than NVDA and it is expected to grow at a slower rate than NVDA.
