National Semiconductor (NYSE: NSM) reported first-quarter earnings on Thursday after the bell. Net sales came in at $314 million, and net income was 13 cents per diluted share. According to our earnings preview, that 13-cent profit beat analyst expectations by a whopping six pennies. I'll tell you, I always enjoy when a company can beat by a little more than the boring penny. The top line also went beyond projections. The call was for roughly $300 million in sales.

Although these numbers represented steep drops when compared to year-ago data, it should be noted that, on a sequential basis, National Semiconductor showed significant improvement. Gross margin went up sequentially on better product mix and a benefit from a plant closing in China.

At roughly 7:30 AM EST, National Semiconductor (NYSE: NSM) released its third-quarter earnings report. The semiconductor company announced earnings of 9 cents per diluted share -- down from 16 cents per share in the second quarter.

In last year's third quarter, NSM reported earnings per diluted share of 29 cents per share. According to MarketWatch, the Street expected NSM to post a loss of 5 cents per share. Quarterly revenue dropped to $292 million, short of the consensus estimate of $296.8 million.

The shares of chipmaker Cypress Semiconductor Corporation (NYSE: CY) are getting hammered today after the company warned that it will swing to a fourth-quarter loss. In a statement, Cypress cited "declining order patterns and turns from all sales channels, all end markets, all geographies, and all of our product lines. In addition, backlog continues to be weak, and we are seeing cancellations and requests for push-outs that are somewhat higher than normal."

The firm now expects to record a quarterly loss of 3 cents to 12 cents per share on sales of $165 million to $180 million. As recently as mid-October, Cypress expected to book a profit of 4 cents to 7 cents per share in the fourth quarter, with sales totaling $194 million to $204 million.

Cypress is hardly the first chip firm to fall on hard times in the current macro environment. The market has already been hit this week with a similar warning from Dow component Intel Corporation (NASDAQ: INTC), while National Semiconductor Corporation (NYSE: NSM) slashed its outlook and announced job cuts.

This afternoon, CY is down roughly 20%, and it's trading less than a point above its current annual low of $2.93. The chip company's warning sparked a rush in the options pits; so far, Cypress has seen more than 6 times its average daily put volume cross the tape. The bulk of these bearish bets have changed hands on the November 4 strike, which has seen volume of 2,113 contracts on open interest of 6,509.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.

National Semiconductor (NYSE: NSM) manufactures a broad range of analog and mixed signal semiconductor devices and subsystems. Products include power management circuits, display drivers, audio and operational amplifiers, interface products and data conversion devices. These are used in communications, networking, automotive, test measurement and aerospace applications. Customers include IBM (NYSE: IBM), Motorola (NYSE: MOT) and Sony (NYSE: SNE). Texas Instruments (NYSE: TXN) is a major competitor.

The firm pleased investors last week, when it reported Q4 EPS of 34 cents and revenues of $462 million. Analysts had been looking for 26 cents and $449.5 million. The gross margin of 65.9% was up sequentially and year over year, driven by cost efficiencies and an improved product mix of higher-value analog devices. Management also guided Q1 revenues to $460-$475 million ($451.22M consensus) and FY09 EPS to about $1.45-$1.51 ($1.24 consensus).

National Semiconductor (NYSE: NSM) is scheduled to release Q4 after the close of trading on June 5.

RBC Capital Markets has a price target of $18 on NSM.

NSM June option implied volatility is at 46; July is at 40 above its 26-week average of 38 according to Track Data, suggesting larger price movement.

Ciena (NASDAQ: CIEN) closed at $29.97 Monday. CIEN is scheduled to report Q2 EPS on June 5.

Bank of America has Neutral rating with a $32 price target on CIEN.

CIEN June option implied volatility of 65 and July option implied volatility of 57 is above its 26-week average of 55 according to Track Data, suggesting larger price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Looking back at recent company statements regarding earnings and guidance, there seems to be a big disparity in the type of companies reporting above average numbers to those reporting below average numbers.

Beating

• Intel Corporation (NASDAQ: INTC) -- Q3 guidance
• National Semconductor Corporation (NYSE: NSM) -- Q1 earnings
• Western Digital Corporation (NYSE: WDC) -- Q1 guidance

In Line

• Texas Instruments Inc (NYSE: TXN) -- Q3 guidance

Missing

• Staples Inc (NASDAQ: SPLS) -- Q2 earnings, Q3 guidance
• Office Depot Inc (NYSE: ODP) -- Q2 earnings
• Harley Davidson Inc (NYSE: HOG) -- 2H2007 guidance
• Weyerhaeuser Company (NYSE: WY) -- Q3 guidance

If legendary mutual fund manager Peter Lynch's adage that higher stock prices follow higher earnings still holds true, then it is time to take a closer look at technology stocks.

National Semiconductor Corporation (NYSE: NSM) reported first quarter earnings of $0.30 per share, easily beating the consensus of $0.25 per share. Sales came in at $471.5 million versus estimates of $467 million. Management is forecasting the wireless semi recovery to continue, seeing second quarter sales up 4% to 7%, hitting $490 to $504 in line with expectations.

The free cash flow machine continues as National generated return-on-invested capital -- ROIC -- of 20% for the fifth consecutive year. This has allowed the company to buyback $4 billion of stock during that time while still investing in R&D.

Incremental flow through of 70% has allowed the company to reduce its shares outstanding to 284 million from 324 million during recent buybacks. When seeking ideas in the semi space, National should remain at the top of the list.

Analog Devices Inc (NYSE: ADI), the high-end wireless chip maker, reported revenue results which slightly exceeded analysts' estimates, however, came in a little light on the bottom line. Analog, for those who do not recall, was one of the best performing U.S. stocks during the 1990s, as many of its high-end chips were in strong demand as wireless networks were constructed around the world.

However, this decade Analog has seen increased competition, particularly from Texas Instruments Incorporated (NYSE: TXN), in the high-end market which has put a damper on its previously strong results. Yesterday's results point to that again as expenses were a bit higher than consensus.

Conversely, National Semiconductor Corporation (NYSE: NSM) has turned into a superb grower in the wireless space this decade. Receiving an upgrade yesterday from Lehman Brothers as the stock has pulled back 14% the past month and a half. Lehman upped its price target to $31 from $29, and increased its rating from Equal Weight to Overweight.

As we have been blogging for the past year, National Semi is in the sweet spot of the wireless semi-space. Buy and stay with this stock as there is good money to be make here. Integrated chips is what the market wants and National provides them.

One of the nation's pioneering chip makers was founded in 1959 by eight engineers who opened for business in a small house above a dentist's office in Danbury, Connecticut. They made transistors, but soon graduated to the new integrated circuits abd moved to California's Silicon Valley.

National Semiconductor (NYSE: NSM) manufactures a broad range of analog and mixed signal semiconductor devices and subsystems. Products include power management circuits, display drivers, audio and operational amplifiers, interface products and data conversion devices. These are used in communications, networking, automotive, test measurement and aerospace applications. Customers include IBM (NYSE: IBM), Motorola (NYSE: MOT), Nokia (NYSE: NOK) and Sony (NYSE: SNE). Texas Instruments (NYSE: TXN) is a major competitor.

National Semiconductor Corporation (NYSE: NSM) generating 62.5% gross margins. Who would have thought?

National also announced a recapitalization in which the company will repurchase $2.4 billion in stock. Yesterday's announcement said the semi company will actually borrow money for the repurchase -- a big change for this industry which historically has avoided leverage.

Why the confidence? Brian Halla, National's CEO, said in last night's conference call that the recent semiconductor trough saw National's gross margins bottom at 59%. This is the second trough where National has been able to generate high margins and remain cash flow positive. Halla went as far to say that "smoother sailing is ahead". A bold statement for a highly cyclical industry.

Also, National is forecasting 1% to 4% revenue growth for the upcoming quarter which historically has been a down quarter. Higher-end value products which is leading to higher ASP and volume increases is driving the higher revenue, with billings up 16% and bookings up 33%.

ROIC was above 20% and National expressed confidence it can maintain this return level for both the short and longer term.

National is becoming a must own stock. Jump into this company, this could be the beginning of a big upswing.

MOST NOTEWORTHY: Royal Dutch Shell PLC (NYSE: RDS.A), Broadcom Corporation (NASDAQ: BRCM) and National Semiconductor Corporation (NYSE: NSM) were today's noteworthy upgrades:

• Royal Dutch Shell was upgraded to Buy from Neutral at Merrill Lynch to reflect the company's strong refining backdrop and potential for positive surprise in the gas and power and downstream segments.
• Broadcom was upgraded to Market Outperform from Market Perform at JMP Securities following positive channel checks and the recent court win over Qualcomm Incorporated (NASDAQ: QCOM).
• UBS upgraded shares of National Semiconductor to Buy from Neutral on the Q4 upside, ongoing share buyback and guidance which calls for further margin improvement.

OTHER UPGRADES:

• Banc of America upgraded shares of Qwest Communications International Inc (NYSE: Q) to Buy from Neutral to reflect greater visibility into cash flow generation potential through 2008.
• Banc of America also upgraded Cincinnati Bell Inc (NYSE: CBB) to Neutral from Sell, as they believe the stock is not a sell in a market focused on cash flow.
• Genentech Inc (NYSE: DNA) was upgraded at Deutsche Bank to Buy from Hold based on compelling valuation and fundamental outlook.
• Bear Stearns upgraded shares of Nordstrom Inc (NYSE: JWN) to Outperform from Peer Perform citing the recent share pullback and top-line growth.

Ralph Whitworth, the head of Relational Investors, was interviewed on Bloomberg last night. Stocks Whitworth likes are Sprint Nextel Corporation (NYSE: S) and National Semiconductor Corporation (NYSE: NSM).

It appears Relational still owns Home Depot Inc (NYSE: HD) where a Relational partner has joined the board. Relational helped force the ousting of former Home Depot CEO Bob Nardelli in January.

What is Whitworth's formula? While he did not explicitly say, it appears he likes companies that generate a lot of cash with underleveraged balance sheets. The combination of which can be used to return cash to shareholders via dividends and share repurchases.

One stock Whitworth said he did not like is Motorola Inc (NYSE: MOT), saying the business is too competitive, citing RAZR phones which sold at one point for $300 now sell for as little as $30.

Whitworth also does not like the auto industry saying it is going the way of the U.S. television manufacturing industry.

Texas Instruments Incorporated (NYSE: TXN), the wireless chip powerhouse, agreed with National Semiconductor Corporation's (NYSE: NSM) report last week that the wireless semiconductor inventory overhang is over. Management comments, made earlier this year, expecting the current market correction to be short-lived, are proving correct.

TI said the inventory overhang is winding down and the company should return to growth in 2Q07. Historically, during the past 10 years, TI has 3% to 4% revenue growth in the June quarter.

National Semi last week reported in-line results with a 14% drop in sequential revenue. However, National said backlog, a good measure of future business, is starting to increase.

National also guided gross margins up to 60% and mentioned the possibility of 65% gross margins, a very good number.

TI narrowed its revenue guidance for 1Q07 to $3.07 billion to $3.22 billion, in-line with previous guidance. EPS was also narrowed to $0.29 to $0.33 per share.

It is a tough time of the year to recommend semi stocks. Historically, semi stocks peak out in March to April and would have a difficult time until the Fall. However, there seems to be some good data points suggesting the worst is over in the semi space.

A strategy I'd consider -- buying some stock now on the good news and adding to your position during the summer doldrums.

National Semiconductor (NYSE:NSM) reported some pretty bleak figures yesterday, but UBS upped its price target on the firm from $25 to $27. It still rates the company's shares "neutral." It may be an example of things being so bad in the chip industry that even mediocre results are considered OK.

For the quarter ending February 25, NSM revenue dropped 21% to $431 million. Wall Street expected $434. Net income dropped to $72 million from $130 million in the year ago period.

The company did say its expected revenue of $444 million to $457 million in the current quarter.

The stock may have gotten cheap. It traded for $30 last May, and recently was as low as $22.20. It closed yesterday below $26 but is up 4% today.

The huge oversupply of semiconductors may finally be behind the industry. Shares in Analog Devices (NYSE:ADI) and ST Microelectronics (NYSE:STM) have also started to recover.

If all of the companies show even minimal growth in the next quarter, the market may assume that their revenue could actually begin to grow again in the second half. It would be a relief for investors who have taken a beating in this sector.

Douglas A. McIntyre is a partner at 24/7 Wall St.

As retail same-store-sales numbers were rolling over and it looked like the economy was showing signs of more modest growth, the highly cyclical National Semiconductor Corporation (NYSE: NSM) showed signs its business might be bottoming and beginning an upcycle.

National Semi reported in-line results, with a 14% drop in sequential revenue. However, backlog, a good measure of future business, has begun to increase. What was also positive was that National guided gross margins up to 60% and mentioned the possibility of 65% gross margins, almost unheard of in National's history.

Also, National mentioned that fab utilization is only at 56%. When asked of the possibility that National could operate at full utilization any time soon, management indicated it is a possibility. This would suggest quarter revenue over $800 million up from $431 million, a very bullish long-term forecast. The analyst who asked the question was skeptical, but it was very interesting to hear management's confidence in the company's outlook.

National's management has pushed its product line to the higher end of analog value chain which is leading to customers willing to pay higher prices for its products. National was one of the first companies to warn of slowing in the semi industry, it appears it is one of the first to signal the worst of the down cycle is over.