Chip stocks posted strong gains Friday, led by National Semiconductor Corp. as Wall Street analysts cheered the company's solid margin performance in the third quarter.
The Semiconductor Holdrs ETF (SMH) gained 1.6% to $28.89.
The stock of National Semiconductor surged 13.7% to $18.58 in intraday trading, the highest level since Feb. 4. The stock last traded up 8.6% to $17.74.
Lehman Brothers maintained its overweight rating on the stock with a price target of $22 and raised its fourth-quarter earnings estimate to 27 cents from 25 cents a share.
"Gross margin continues to beat expectations at 64% vs. our estimate of 63% due to higher manufacturing efficiencies, pricing, and product mix," said analyst Romit Shah. "Despite the prospect for declining growth, we think stable margins should support a higher multiple and limit downside to [earnings-per-share]."
Merrill Lynch reiterated its buy rating on the stock.
In a note to clients, analyst Srini Pajjuri said that even in a challenging macro-economic environment, National Semiconductor is on pace to reach its 65% gross margin target in mid-2008, "with potential to move past on mix improvements over time."
"Despite near term macro concerns, we believe National Semiconductor can grow at least in line with its peers given its exposure to wireless and power management markets," Pajjuri said. "We ... believe the Street continues to underestimate the margin leverage."
Late Thursday, National Semiconductor reported third-quarter net income of $71.2 million, or 28 cents a share and revenue of $453.4 million.
The latest results included $19.6 million of pretax severance and restructuring expenses related to a previously announced factory modernization effort, and about $11 million of discrete tax benefits.
The mean estimate of analysts polled by Thomson Financial was for earnings of 23 cents a share for the quarter and revenue of $457.4 million.
