National Semi Puts the Trough Behind It

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 |  About: National Semiconductor Corporation (NSM)
by: William Trent, CFA

National Semiconductor Corporation (NSM) today reported net income of $90.1 million, or 28 cents per share, on sales of $455.9 million for the fourth quarter of fiscal 2007, which ended May 27, 2007. This was better than analyst estimates of $0.23 on $451 million in sales and at the high end of management’s guidance for 3-6% growth. Perhaps they were right about the trough being behind them. According to the company:

Gross margin in National’s fourth quarter of fiscal 2007 was 62.5 percent, a new record for the company and up from last quarter’s gross margin of 59.8 percent.

That is despite recent inventory drawdowns, which tend to depress margins in the short term (because higher production spreads fixed costs over a larger unit base.) As a result, their short-term target of 65% gross margins appears increasingly doable.

Based upon current business conditions, National anticipates that sales in the first quarter of fiscal 2008 will be up 1 to 4 percent over the fourth quarter of fiscal 2007. Gross margin is expected to improve while operating expenses are also projected to increase.

The consensus estimate of $459 million is just a 1% rise sequentially, so that amounts to a positive surprise in my book. I’m prepared to be wrong in the short term about the direction of semiconductor stocks, but with more reports like this one I may not have to suffer.

Disclosure: author has a short position in SMH put options at time of publication.

NSM 1-yr chart:

NSM 1-yr chart