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Market Update

National Semiconductor's Warning Not as Bad as Market Implies

Chipmaker's shares just keep getting cheaper.


What Happened?
Echoing recent announcements from bellwethers Intel (INTC) and Texas Instruments (TXN), National Semiconductor (NSM) on Monday evening warned investors that earnings in its November-ending quarter will be significantly below expectations. Instead of a sequential increase, sales will likely decline 6%-8%, and margins will also decrease a few percentage points. Management attributed most of the shortfall to a few wireless customers that have overbuilt inventories, as well as lower-than-expected demand for computers. Both the wireless and computer industries are key end markets for the firm.

What It Means for Investors
Leading up to this earnings warning, our thesis was that while National Semiconductor is not one of the most desirable firms in the chip sector, its stock is a very decent value. We believe that the story is still much the same, but that investors will have to remain patient to reap the benefit of the cheap shares. Using the guidance management gave, earnings will be significantly lower this fiscal year, assuming a sequential sales decline in the upcoming quarter, a modest improvement in the fiscal third quarter, a fairly normal fiscal fourth quarter, and overall lower-than-expected margins on the year. Factoring in the lower expectations would put National Semi's stock at less than 10 times fiscal 2001 earnings; we believe this is dirt cheap for a firm slated to increase its top line by roughly 20% this year.

Jeremy Lopez does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.