Description

Currently NSM is almost 50% of it's 52 week highs and presents a high value
given it's current TTM PE of 14.03 which is comparitively low. There are
only two semiconductors of such value that I am aware of and this is one
of them. For all the details of this company there is one which gives me
the most confidence in it. I have three friends that work for National
Semiconductor. One of them is a close friend and one of the smartest
people I have ever met, both technically and as an entrepreneur. He
has put an enormous stake in 2002 expiration NSM options. I don't know
the exact number of contracts, but I do know the value of the contracts
was well over $6,000,000 at one point (previous to the high), which is
nearly 100% of his portfolio. While I don't have any special information
on the company, such a vote of long term confidence from someone I have
always been so highly impressed with is a strong indicator.

Recently NSM received an award for Best Technology at the Wireless Japan 2000
exhibition in Tokyo for a bluetooth wireless technology. Bluetooth
is a standard which is meant to connect products without using
direct connections with wires or infrared. This is poised to become
popular as more and more focus begins on peer-to-peer technologies.

Another factor that most people probably don't realize is that by
selling Cyrix to VIA, this once again makes Intel willing to use
NSM as a supplier. This alone was enough to increase their revenues
after the sale. Keep in mind that in addition to being a huge supplier
of semiconductors, Intel also needs a lot of semiconductors to integrate
into their wide array of products.

NSM's lead times are in the range of 4-6 weeks and prices have remained
firm. While much of the hype the last couple years has been on digital
circuits and how they are superior. Analog semiconductors are actually
easier to design for many applications. I don't remember the reason
why as my cuircuit design is a little rusty. NSM is a leader in high
performance analog components.

As a secotr the broad line PE is still 60.6 even with the recent panic
over the end of the semiconductor cycle. Certainly significant upside
is still available. As with all semiconductors the barriers to entry
are high. It's debt/equity ratio is only .03 which is one fourth of
the industry average. Given this is a very capital intensive sector,
I see this as a strong positive. this means it has cash available for
the ineviatable costs of retooling or expansion. Net profits have
increased to 29.3% for the year compared to the 5 year company average
of a 2.3% loss. While revenue and income growth are below the industry
averages (36.3% sales growth and 141.1% income growth per sector), their
profit margins are above sector levels. I certainly don't feel that
such a substandard PE for the sector is completely warranted.

Catalyst

This parallels my main investment idea in many ways. The largest similarity
being past failures leading to a lower valuation than it's peers. This
will likely change after a couple quarters of positive sustained earnings.
Another issue right now is fear of slowing handset sales. I feel this is
a result of supply constraints on flash memory and other important peices
required to constuct the higher end phones. Once those fears pass and
the increase in use of analog in other components clearly limits possible
negative impact of exposure to handsets which is only 25% of it's revenue.