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Why National Semiconductor Is Best Barometer


Company's diversified customer base shows demand from economic sectors where others have little to no exposure.

If you queried a group of technology investors about which company was the bellwether or barometer of the semiconductor industry, I think the overwhelming majority would say Intel (INTC). After all, it's the largest and its exposure to consumer and corporate spending cycles is second to none. However, while all that may be true, I'd argue that National Semiconductor (NSM) is a better barometer for how the stocks are going to perform than Intel.

National Semiconductor's customer base is far more diversified than Intel's, so you're seeing demand from economic sectors where Intel has little to no exposure. Add to that the fact that when it reports its third fiscal quarter on March 11, you'll get a window into what its peers are experiencing in January and February.

Take a look at the graph below which is the Philadelphia Semiconductor Index (SOX) back to September 1, 2008. On it I've plotted National Semiconductor "events" as well, and here's how they shake out.

The SOX has been weakening all summer as concerns rise around the financial meltdown. National Semiconductor reports its August quarter with numbers that are light and the outlook is as well. That's not what you want to hear heading into the seasonally strongest quarter of the year.

Over the next 90 days, the SOX falls 41%.

B. National Semiconductor confirms the deterioration by reducing guidance on November 12, 2008 with a $50-$60 million cut in revenue guidance or more than 10%.

C. On December 8, 2008, National Semiconductor reports revenue at the low-end and EPS is $0.14 versus the Street's $0.21. Furthermore, guidance is a whopping 25% below Street consensus.

Over the subsequent 90 days, the SOX rises a modest 7%. Have investors sensed that this is the bottom? Are estimates are finally low enough? Has there been enough restructuring?

D. The company reports on March 11, 2009. Revenues are in-line but EPS is $0.09 versus the expectation of a loss in the quarter showing that there's leverage from the changes that were made thus far. Revenue guidance is again light but only 5%-10% below the street.

The SOX rockets 33% over the next three months.

E. The second fiscal quarter is reported on June 11, 2009. The company has taken another major restructuring change but the loss per share is still better than the street had anticipated. Revenue is also a little better demonstrating some life in the top line. Guidance is also easily above Street expectations.

The upside and outlook adds another 16% to the SOX over the next 90 days.

F. On September 10, 2009, the company reports results with both the top and bottom line beating Street consensus. Not huge upside on the revenue side but it's there. Revenue guidance is also 3%-8% above consensus. That's good but, as mentioned earlier, this is a little disappointing because it's the strongest seasonal quarter.

The SOX response is muted with only 4% appreciation over the subsequent quarter.

G. When National Semiconductor reports its fiscal second quarter on December 10, 2009 investors get a big EPS number courtesy of the reduced cost structure but little upside to revenue. Guidance is a little better but nothing dramatic.

Investors know they're going to get EPS surprises from virtually everybody given the restructuring that's taken place. However, if there's really a recovery taking place we should be seeing more positives at the revenue line. The SOX gives a little bit of credit but not much (+4%) over the next three months.

National Semiconductor's results are certainly not a perfect predictor of what may be happening to other semiconductor companies. Execution is still a company-specific process and there remain far too many macro events that trump fundamentals. That being said, after more than 25 years in the investment business, I find National Semiconductor provides a much better peek at the future than most others.

My sense is that investors better start seeing some big top-line surprises here and at other companies or their belief in a recovery will wane. Obviously, so will the stocks and the SOX.
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No positions in stocks mentioned.
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