Friday, March 09, 2007

Color on results: National Semi (NYSE:NSM)

Several firms comment on National Semi (NYSE:NSM) after the maker of power management and other chips last night said inventory concerns appeared to be behind it:

- Wachovia says National delivered a positive outlook, forecasting sequential growth of 4.5% in the company's May quarter, following 3 straight quarters of sequential decline in sales (Revenue is expected to decline 21% yr/yr). Management believes the worst of the inventory correction is behind the company, in line with firm's checks on the broader analog space. While it appears they have been too negative on the company's wireless handset business (25%-30% of sales), they still have concerns about increased competition and the potential deceleration in growth for National in this market. NSM is trading at a 21x PE on current year EPS, right in line with the average of the HPA group.

Bookings increased 3% q/q, reversing two straight quarters of decline. National stated that bookings increased in mid January and have remained steady, with orders from distribution, EMS and OEMs all showing improvement. The company noted strength in wireless handset bookings (+14% q/q), comm/networking (+25%), and displays (+5%), while industrial/medical/consumer was flat and PC bookings down 10% q/q. Book-to-bill was greater than 1:1 for the first time in three quarters.

WACH's new May quarter estimates are $448 million in revenue and $0.27 in EPS, up from $440 million and $0.25. FY07 (May year-end) goes to $1.92 billion and $1.34, up from $1.91 billion and $1.24. Maintains Market Perform.

- Merrill Lynch notes the question du jour following National's revenue outlook will likely be whether or not the analog market is bottoming. Indications of distributor inventory declines coupled with booking increases suggest it's a possibility. The notion is supported by a decline of National's internal inventory of 3%, although they note days are up to nearly 90 days. ML thinks we're close enough to the trough to turn the focus to which companies are best positioned to leverage an industry uptick.

Unlike many of its peers, National still has viable margin levers to pull when the sector returns to revenue growth. In an environment where many analog players are struggling to balance growth and margins in their long-term strategies, the firm finds National coming off a very weak revenue trajectory with a solid 59.8% gross margin on just mid-50% utilization. A look at mix yields further potential upside to margins, as the higher margin standard analog business still only represents 84% of total revenue.

- JP Morgan says National is the third semiconductor company in the past three weeks with a book-to-bill above 1.0 and they expect more companies to report book to bill ratios above 1.0 as 1Q07 progresses.

Inventory build concerning. Inventory increased 14 days QoQ from 77 days in F2Q07 to 91 days in F3Q07, above the company's target range of 75-80 days and the highest since 1997. JPM is concerned the inventory build will mute margin recovery during C07.

As a result, they are raising F07 revenue and EPS estimates from $1.9 billion and $1.03 to $1.9 billion and $1.08 but lowering F08 revenue and EPS estimates from $2.0 billion and $1.25 to $1.9 billion and $1.16 due to a muted recovery. Maintains Neutral.

Notablecalls: NSM sure sounded optimistic. That comes only a month after they warned. The co has large exposure to cellural handset markets and noted seeing some real order strength there. As several tier-1 houses have upgraded the shares over the past couple of weeks I suspect the upside from levels reached in after hours action is limited.

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