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.
