National Semi Chooses Margins Over Volume

National Semiconductor (NYSE: NSM) reported steady-as-she-goes earnings last night, with 9.6% revenue growth and a 46% boost in earnings per share over last year, despite this being the first quarter of reporting stock-based compensation.

It's an impressive showing from a company facing low demand for its LCD display and cellular handset chips. Next to competitor Analog Devices (NYSE: ADI), which is dealing with many of the same demand issues in the same markets, National saw slower sales growth, but it more than made up for that with much better margins. The story behind this duality is that National focused on pushing out its next generation of products at higher average prices, though in lower volumes than hoped for.

This produced a nice margin boost, but also created a bulging inventory channel. Let's imagine that inventory growth had kept pace with sales at 9.6% (more inventory sold) rather than leaping ahead to a 24.6% year-over-year change (less inventory sold). We would have seen another $24 million of revenues from the sales of these now-warehoused items -- and at gross margins somewhere around 60%, that's another $14 million of net earnings. That would've comfortably beaten the company's original guidance and increased earnings to somewhere around $0.39 per diluted share (give or take a couple of pennies), depending on gross margin expectations for that shelved product hoard.

That's just a thought experiment, of course, since it didn't quite happen that way. The upshot of this story is that National decided to stand firm on pricing and sacrifice some volume, and came out looking rather good in the end. But there are many ways to make a profit, and given the exact same circumstances, different companies will go different ways.

For some extreme examples of the high-growth, low-margin strategy, check out fashion retailer Charlotte Russe (Nasdaq: CHIC) or computer maker Dell (Nasdaq: DELL). Meanwhile, amusement-park operator Cedar Fair (NYSE: FUN) and security-software maven VeriSign (Nasdaq: VRSN) prove that you can grow earnings going the exact opposite way, too. National and Analog aren't anywhere near as extreme as these cases, but the former trends toward the high-margin end of that spectrum, and the latter leans toward the high-growth camp.

Further Foolishness:

• A weathervane could've helped you find this market lull early.
• Find out more about margin hogs and speed demons.

National Semi is paying a dividend these days, which is unusual for a tech company. Does that make it worthy of Income Investor consideration, or is it still missing some part of the magic formula? Try a free 30-day subscription to the service and decide for yourself.

Cedar Fair is an Income Investor pick. Dell is a selection of both Inside Value and Stock Advisor .

Fool contributor Anders Bylund holds no position in any of the companies discussed here, and he'd look ridiculous in Charlotte Russe gear. You can check out Anders' holdings if you like. Foolish disclosure is always extreme.