National Semi Stock Slumps, Despite Rosy Quarter and Outlook - TheStreet

National Semi Stock Slumps, Despite Rosy Quarter and Outlook

Topping forecasts and raising guidance doesn't satisfy traders.
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Updated from 12:48 p.m. EST.

National Semiconductor

(NSM)

reported a strong fiscal second quarter on Thursday, beating Wall Street's expectations for both revenue and earnings. The chipmaker also gave better-than-expected guidance for the traditionally weaker fiscal third quarter, but its shares were sliding nevertheless.

Shortly before trading was halted for the earnings announcement at 12:15 p.m. EST, National Semi shares were off 14 cents to $43.36. After being reopened for trading, the stock briefly reversed higher, but in recent trading NSM was off $2.69, or 6.3%, to $40.71.

The company posted a profit of $65.8 million, or 34 cents a share, on a generally accepted accounting principles (GAAP) basis, on sales of $473.5 million in the November quarter. Revenue was up 11% sequentially and 12% year over year.

National's second-quarter net results included a charge of $6 million for severances and other items related to cost cutting. Without the charges, the company would have earned $71.1 million, or 36 cents a share, 4 cents better than the consensus of analysts polled by Thomson First Call. Analysts were expecting revenue of $463.34 million for the quarter.

The quarter gave evidence that the company's focus on profitability is paying off. Margins were up sequentially to 50.1% from 47.2%. On a GAAP basis, National earned $6.2 million, or 3 cents a share, a year ago.

Looking at the third quarter, National told investors to expect sequential growth of 3% to 5%, or $487.7 million to $497.2 million and a "slight" increase in margins. The projected increase in revenue is surprising because sales of electronic components normally drop in the current quarter, ending in February. Wall Street expected a drop in revenue to $458.64 million.

Prior to the call, analysts were expecting third-quarter earnings of 30 cents a share. National Semi's management did not give EPS guidance.

It's worth noting, however, that National Semi's third quarter has an extra week, a quirk of the calendar that occurs a few times a decade and inflates revenue and expenses. However, CEO Brian Halla notes that their third quarter has been slower than the second quarter 11 out of the last 13 years, despite the occasional extra week. The bottom line: This third quarter will be stronger because business is stronger, the company said.

Still, Halla was cautious, saying "I'm holding short of calling a recovery." He also said that part of the strength of the second quarter was due to double ordering by customers worried about potential shortages, but overall "products are selling through."

In early November, NSM preannounced upside to its second-quarter revenue guidance, saying it should grow in a range from 7% to 10%. Previously, the company was expecting growth in the 4% to 7% range. The upside was driven by strong bookings within the wireless segment and other product areas.

National Semi's strategic move away from digital technology to focus on analog appears to be a good one, and the market has been rewarding it. So far this year, shares of the Santa Clara, Calif., company have appreciated a phenomenal 195%, compared to about an 82% gain for the Philadelphia Stock Exchange Semiconductor Index and 48% for the

Nasdaq Composite

.

Those heady gains have made some observers gun shy about National Semi's stock at current levels. JMP Securities analyst Ross Semore recently published a rather positive note on the company, but nevertheless maintained his "hold" rating on the stock. At 30 times fourth-quarter earnings estimates, excluding cash, National Semi's "restructuring and growth outlook are fully reflected in today's stock price," he wrote. (JMP does not have a banking relationship with National.)