An Analog Play on a Digital World

11/07/2007 12:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Vahan Janjigian, editor of Forbes Growth Investor, says that National Semi will profit from its wide range of products that improve the performance of electronic devices.

National Semiconductor (NYSE: NSM) makes a broad range of analog and mixed signal integrated circuits (ICs). About 80% of its business comes from outside the US. Its more than 14,000 products provide portability, energy efficiency, sharper picture quality, better audio quality, and improved overall performance in a variety of electronic devices.

Analog semiconductors are typically used to enrich the graphics and audio of electronic systems and manage power. They produced about 91% of NSM’s fiscal first-quarter 2008 revenues. Power-management products include high-efficiency switching voltage regulators and controllers, high-performance low dropout voltage regulators, and battery ICs.

The analog segment includes NSM’s display business, which makes products that enhance resolution, color, and power efficiency of displays on handheld products, automotive entertainment consoles, navigation systems, liquid crystal display (LCD) televisions, and notebook computers. These products include data receivers and transmitters, integrated display drivers, and timing controllers.

The remainder of NSM’s revenues is derived from nonanalog product sales such as microcontrollers, DVD chipset solutions, connectivity processors, and embedded
Bluetooth solutions. Just a few years ago, NSM was facing lower demand for its products as customer inventory levels climbed.

Management responded by streamlining manufacturing operations and shedding low-margin, non-core businesses. The elimination of low-margin businesses led to a 10.6% year-over-year decline in fiscal 2007 net sales. However, the gross profit margin improved 177 basis points to 60.74%.

This trend has continued into the current fiscal year. Fiscal first-quarter 2008 net sales fell 12.9% from a year ago to $471.5 million, but the gross profit margin improved 122 basis points year-over-year to [nearly 63%]. Nonetheless, higher R&D expenses and increased interest expenses resulted in a 28.7% decline in net income to $85.6 million, or 30 cents per share.

Much of NSM’s recent growth is a result of strong demand from the wireless-handset and consumer-devices markets. As a result, a significant drop in consumer spending could lead to higher customer inventory levels and softer sales in future periods. However, inventory levels at distributors remain low and recent order activity has been strong. First-quarter bookings grew 6%, primarily due to greater demand from original equipment manufacturing (OEM) customers in Asia and Europe. Management expects net sales to improve 4% to 7% sequentially in the fiscal second quarter with an additional expansion in the gross profit margin.

Furthermore, favorable trends for LCD televisions and multifunctional portable devices, along with calls for longer battery life and energy conservation, bode well for NSM. (The stock closed above $25 Tuesday—Editor.)

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