Chip Shortages Help This Company

Running your own factories can pay off sometimes. Fabless semiconductor design has become an accepted business model, and major chip companies like Texas Instruments (NYSE: TXN  ) and Advanced Micro Devices (NYSE: AMD  ) have taken steps over the last few years to outsource more of their manufacturing processes.

The decision to move away from in-house factories and into third-party foundries like Taiwan Semiconductor Manufacturing (NYSE: TSM  ) has saved operating costs and capital expenses for these companies, but the resurgent semiconductor market has revealed a flaw in that tactic: Taiwan Semi and company can't always react to surging demand fast enough. Everyone from TI to NVIDIA (Nasdaq: NVDA  ) is reporting supply constraints caused by traffic jams at the foundries.

Everyone, that is, except National Semiconductor (NYSE: NSM  ) , which runs its own chip-burning plants, and it can handle lots of business that might have gone to the competition, if not for their supply problems. The company's third quarter saw sales soaring by 24% year over year to $362 million, with an eye toward as much as $390 million coming up in the next quarter.

This quarter's net income included $6.4 million in restructuring charges, as the company recently simplified its operating model a bit; also, the year-ago period saw $11 million of one-time tax benefits. Despite that double negative for year-over-year comparison purposes, earnings jumped from $0.09 per share to $0.22 per share.

National's book-to-bill ratio has stayed above the critical 1.0 mark for several periods in a row, which points to either manufacturing issues or a strong order pipeline. The plants are cruising at about 50% utilization, and they should be in the low-60s after some upcoming capacity closures. The sweet spot for cost-effective operations lies around 75% utilization for National, which leaves room for margin expansion as demand continues to fill the order books.

Since National makes a significant part of its sales in the mobile handset market, with major customers such as Apple (Nasdaq: AAPL  ) and Research In Motion (Nasdaq: RIMM  ) , the continued health of that sector should keep National and its shareholders happy for the foreseeable future.

National is a small fish in a big sea of semiconductor stocks, and perhaps overlooked by most investors. Only 287 players have given the stock a rating in Motley Fool CAPS, where it is a lowly two-star ticker today (out of five). Texas Instruments is a four-star stock on the strength of more than 1,500 votes. Is that fair, considering TI's manufacturing shortages and National's lack thereof? Swing by CAPS today and set the record straight with your own ratings.

Fool contributor Anders Bylund owns shares of AMD, TSMC, and a selection of other fine acronyms, but he holds no other position in any of the companies discussed here. Apple and NVIDIA are Motley Fool Stock Advisor choices. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (6) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 15, 2010, at 4:35 PM, demodave wrote:

    I guess that by living in Dallas and seeing news of a National fab in Arlington being shut down (also read as "some upcoming capacity closures"), I don't take a high a view of the company. Similarly, living in Dallas and watching TI *opening* a fab in Richardson (both Arlington and Richardson are suburbs), I am much more bullish on TI. The fact that very few people on CAPS have rated National may be a function of the fact that most people are clueless about the semi industry, and the fact that - if no one specifically tells them through advertising - most people don't know who manufactures the chips inside their computers/cars/HVAC.... TI is hard to ignore.

  • Report this Comment On March 15, 2010, at 4:36 PM, demodave wrote:

    I guess that by living in Dallas and seeing news of a National fab in Arlington being shut down (also read as "some upcoming capacity closures"), I don't take a high a view of the company. Similarly, living in Dallas and watching TI *opening* a fab in Richardson (both Arlington and Richardson are suburbs), I am much more bullish on TI. The fact that very few people on CAPS have rated National may be a function of the fact that most people are clueless about the semi industry, and the fact that - if no one specifically tells them through advertising - most people don't know who manufactures the chips inside their computers/cars/HVAC.... TI is hard to ignore.

  • Report this Comment On June 11, 2010, at 8:41 AM, olivia1002 wrote:

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  • Report this Comment On June 16, 2010, at 5:01 AM, martinageo wrote:

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  • Report this Comment On June 16, 2010, at 5:02 AM, martinageo wrote:

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  • Report this Comment On August 14, 2010, at 7:02 PM, davidcrls40 wrote:

    This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone.

    I appreciate the concern which is been rose. The things need to be sorted out because it is about the individual but it can be with everyone.This somebody's net income included $6.4 cardinal in restructuring charges, as the lot new simplified its operative expose a bit; also, the year-ago stop saw $11 million of one-time tax benefits. Despite that relief electronegative for year-over-year equivalence purposes, earnings jumped from $0.09 per share to $0.22 per percentage.

    Federal's book-to-bill ratio has stayed above the pettifogging 1.0 characterize for various periods in a row, which points to either manufacturing issues or a robust arrangement line. The plants are cruising at about 50% utilization, and they should be in the low-60s after whatsoever upcoming susceptibleness closures. The treat fleck for cost-effective transaction lies around 75% utilization for Federal, which leaves gathering for lucre discourse as condition continues to turn the ordination books.

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