Semiconductor investors are concerned about the health of their favored industry, fixating on reports from companies such as Analog Devices
Though revenues plummeted by 21% from a year ago to $431 million, gross margin was 59.8%. Last year's gross margin was 60.7%, despite the much higher revenue. That gross margins fell so little is impressive, because the high fixed costs associated with semiconductor manufacturing typically cause gross margins to rise or fall in tandem with revenues rises. When revenue decreases, the fixed costs are spread over a smaller number of parts, and the higher fixed cost per part leads directly to lower gross margins. When National's business perks up, its gross margins should reach the mid-60% range.
It's easy to see the improvement at National by looking back a bit to the second and third quarters of 2005. During both of these quarters, it recorded revenue right around $450 million -- just a little higher than its most recent quarter. But look at the difference in gross margin. The business achieved a gross margin of just 50.6% during Q2 2005, and 52.7% Q3 2005.
Why the improvement?
In short, National has been able to increase the average selling price of its products by continually improving their performance. For example, the company sells products that provide power to mobile phones. Since customers want reliable phones with long-lasting batteries, mobile-phone manufacturers will migrate to suppliers that can provide such components.
One can certainly quibble with National's forecasting of its business. More general worries about the semiconductor cycle and the economy may also be valid. But National's management is doing a good job of pursuing markets in which it can differentiate its products. I won't say that these shares are definitely a buy -- only you can decide that -- but they're at least worth a look if the recent market malaise continues.
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Fool contributor Dan Bloom has no financial interest in any company mentioned in this column.