National Semiconductor's Chips Are Hip


National Semiconductor's Chips Are Hip

A surprisingly good earnings report helped send this chipmaker's shares higher.

Last June, National Semiconductor gave each of its 8,500 employees a video Apple iPod as a reward for the company's most successful fiscal year. This time around, the Santa Clara, Cal., chipmaker might want to pre-order some iPhones for its workers.

National makes the silicon guts that help mobile devices, such as the widely anticipated iPhone, squeeze as much juice as possible from their batteries. The company's main business is producing semiconductors called analog power management chips. "National's long lead in this area and excellent intellectual property has made it the company to beat when it comes to power management," says Morningstar analyst Erik Kobayashi-Solomon. National's chips are also used in flat-panel display screens, computers and high-definition television sets.

Shares of National Semiconductor got a jolt with the company's latest earnings release. The stock (symbol NSM) surged 14.7%, to $29.58, on June 8 after the company reported that increased orders and stronger profit margins helped it post better-than-expected earnings for its fiscal fourth-quarter, which ended May 27. The company also approved a plan to buy back more than $1.5 billion of its stock over the next 12 months.

After such a big share-price run-up, is National Semi still worth buying? Many analysts think the stock has more room to run. Strong sales and earnings from products launched in the past three years and growing demand from companies that make wireless devices mean that National can sustain its high profit margins, says UBS analyst Uche Orji, who also cited the robust share buyback product in upgrading the stock from "neutral" to "buy" on June 8. He thinks the shares are worth $32.


Raymond James analyst J. Steven Smigie is even more bullish. The stock trades at 25 times the $1.19 per share that analysts, on average, expect the company to earn in the fiscal year that ends next May. Because of improving profit margins and share buybacks, Smigie thinks the stock could be re-valued to trade at 27 times earnings. He has a $38 target price and rates the stock a "strong buy."

Chip stocks are volatile. The cyclical nature of the semiconductor industry leads to erratic earnings. A favorable product mix gives National Semi some protection. As a maker of analog chips, it is not as dependent on cutting-edge manufacturing techniques as are makers of digital chips, says Kobayashi-Solomon. But the company is highly dependent on the fickle mobile-phone market. National Semi's prospects are bright for the moment, but it's difficult to predict its fortunes beyond the next year.