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 Inc (NYSE: TXN), the wireless chip giant, reported strong results last night, citing the wireless semiconductor inventory overhang as being over. Most impressive was the level of profitability during this downturn with TI exiting a semiconductor trough with 51% gross margins and over 20% operating margins.

Since 25% of revenue in semiconductor orders is from consignment or EDI systems, the information is pretty good that an upswing is beginning. Also, along with book-to-bill hitting 0.99, March sales increased 20% versus sales in February. Further, April's numbers remain strong.

TI said the biggest factor for the upswing is the inventory overhang being over, which is having more of an impact than specific product wins. However, its high-end analog products' compound annual growth rate is 19% versus 8% for its primary competitors.

Also, look at National Semiconductor Corporation (NYSE: NSM), which has followed a similar patten during this inventory correction. National will most likely give investors more bang for the buck. Further, it is time to start looking at Motorola. If there was a true inventory overhang, with its stock down big, investors need to start chipping away at the RAZR manufacturer.

MOST NOTEWORTHY: Four analog semiconductors, Archer Daniels Midland Co (ADM) and United Technologies Corp (UTX) were today's more noteworthy initiations:

• Bear Stearns initiated Analog Devices, Inc (NYSE: ADI) and National Semiconductor Corp (NYSE: NSM) with Outperform ratings and Linear Technology Corp (NASDAQ: LLTC) and Maxim Integrated Products Inc (NASDAQ: MXIM) with Peer Perform ratings.

• Archer Daniels Midland Co (NYSE: ADM) was initiated with a Neutral rating at Banc of America based on expected declines in ethanol margins. JP Morgan started shares with an Overweight rating.

• United Technologies (NYSE: UTX) was started with a Strong Buy rating at Matrix USA with a $90 intrinsic value...

OTHER INITIATIONS:

• CIBC initiated Quest Software, Inc (NASDAQ: QSFT) with a Sector Performer rating.

• Credit Suisse reinstated shares of Regal Entertainment Group (NYSE: RGC) with an Outperform rating.

• Merrill Lynch started BigBand Networks, Inc (NASDAQ: BBND) with a Neutral rating, ThinkEquity started shares with an Accumulate rating and $19 target, Jefferies started them with a Buy rating and Cowen started shares with an Outperform rating.

• RBC Capital initiated shares of Sunstone Hotel Investors, Inc (NYSE: SHO) with an Outperform rating.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: National Semiconductor Corp (NSM), Seagate Technology (STX), Adolor Corp (ADLR), Conexant Systems, Inc (CNXT) and Blyth, Inc (BTH) were today's noteworthy downgrades:

• Matrix downgraded National Semiconductor (NYSE: NSM) to Buy from Strong Buy because inventory oversupply conditions have dissipated more rapidly than expected. Matrix believes National Semi will see price stability and orders increase as excess products continue to move through the supply chain.
• Needham cut Seagate Technology (NYSE: STX) to Buy from Strong Buy following the company's lowered guidance as the firm believes margin improvement has been "temporarily derailed"; however, the firm believes valuation limits downside at current levels.
• Adolor Corp (NASDAQ: ADLR) was downgraded to Market Perform from Outperform at Friedman Billings, to Neutral from Outperform at Cowen, to Neutral from Buy at First Albany, to Sell from Hold at Citigroup and to Hold from Buy at both American Technology and W.R. Hambrecht, after reporting additional safety issues related to Entereg.
• Elsewhere, Roth Capital downgraded shares of Conexant Systems Inc (NASDAQ: CNXT) following lowered Q2 guidance and cited weakness in end markets and lack of near-term catalysts.
• Stanford cut Blyth, Inc (NYSE: BTH) to Sell from Hold on valuation.

OTHER DOWNGRADES:

• Matrix cut Nike, Inc (NYSE: NKE) to Hold from Buy.
• Goldman took Microsoft Corp (NASDAQ: MSFT) off its Conviction Buy List.
• JP Morgan took CSX Corp (NYSE: CSX) down to Neutral from Overweight based on valuation.
• Prudental downgraded Groupe Danone (NYSE: DA) to Neutral from Overweight.
• ASML Holding NV (NASDAQ: ASML) was downgraded to Market Weight from Overweight.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Brinker International Inc (EAT), National Semiconductor Corp (NSM), and three select transportation stocks were today's more notable upgrades:

• UBS upgraded Brinker International Inc (NYSE: EAT) to Buy from Neutral with a $38 target, citing valuation following the recent sell-off.

• National Semiconductor Corp (NYSE: NSM) was upgraded to Accumulate from Source of Funds with a $28 target at ThinkEquity, following the company's Q3 report and guidance.

• Three transportation companies were upgraded at Stifel: Con-Way Inc (NYSE: CNW), FedEx Corp (NYSE: FDX) and Universal Truckload Services Inc (NASDAQ: UACL) were upgraded to Buy from Hold to reflect attractive valuations.

OTHER UPGRADES:

• Credit Suisse upgraded Office Depot, Inc (NYSE: ODP) to Outperform from Neutral.

• JMP Securities upgraded Texas Instruments Inc (NYSE: TXN) to Market Outperform from Market Perform ahead of the mid-quarter upgrade. Texas Instruments was also upgraded to Buy from Hold at Stifel.

• Calyon Securities upgraded Halliburton Co (NASDAQ: HAL) to Add from Neutral on valuation.

• Bernstein upgraded Charles Schwab Corp (NASDAQ: SCHW) to Outperform from Market Perform.

• BMO Capital Markets upgraded Cognos Inc (NASDAQ: COGN) to Outperform from Market Perform. BMO believes Cognos will receive additional business due to Oracle Corp's (NASDAQ: ORCL) acquisition of Hyperion Solutions Corp (NASDAQ: HYSL) and also see a greater chance that Cognos itself could be acquired.

• Cowen upgraded King Pharmaceuticals (NYSE: KG) to Neutral from Underperform citing Skelaxin's new label approval, which likely delays a generic.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

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.

MOST NOTEWORTHY: The Coca-Cola Co (KO), Merck & Co (MRK) and National Semiconductor (NSM) were some of today's more notable upgrades:

• The Coca-Cola Co (NYSE: KO) was upgraded to Buy from Hold with a $57 target at Deutsche Bank based on valuation.

• Merck & Co (NYSE: MRK) was upgraded to Buy from Hold at Citigroup to reflect the firm's bullish outlook for the company's diabetes drug, Januvia. Citigroup believes the drug will help drive above-consensus earnings following its recent diabetes survey.

• National Semiconductor (NYSE: NSM) was upgraded to Strong Buy from Market Perform at Raymond James.

OTHER UPGRADES:

• Robert W. Baird upgraded shares of Comverse Technology (NASDAQ: CMVT) to Outperform from Neutral based on valuation and potential catalysts that include a possible break-up of the company.

• RBC upgraded Research in Motion (NASDAQ: RIMM) to Outperform from Sector Perform with a $180 target, as checks indicate shipment and sub-momentum from the company's product cycle will be significantly greater than anticipated.

• Kellogg (NYSE: K) was added to Lehman Brothers' Favorites List.

• Stanford upgraded Brooks Automation (NASDAQ: BRKS) to Buy from Hold with a $20 target on improved industry conditions, cash generation and valuation.

• Cowen added Ericsson Telephone Co (NASDAQ: ERIC) and Oracle Corp (NASDAQ: ORCL) to its Focus List.

• Matrix USA upgraded J.C. Penney Co Inc (NYSE: JCP) to Strong buy from Buy with an intrinsic value of $115.

• Wedbush upgraded LSI Logic Corp (NYSE: LSI) to Buy from Hold with a $13 target.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Seagate Technology (STX), Analog Devices inc (ADI) and Whole Foods Market Inc (WFMI) were some of today's notable upgrades:

• AG Edwards upgraded Seagate Technology (NYSE: STX) to Buy from Hold citing improving fundamentals as the company ramps 1.8" drives in the first quarter, with a potential Apple (AAPL) qualification, and market share gains in notebooks.

• ThinkEquity upgraded Analog Devices Inc (NYSE: ADI) to Accumulate from Source of Funds, with a target of $38, as they believe the improvement in bookings are sustainable; Citigroup also upgraded Analog Devices, to Buy from Hold, to reflect the company's earnings expectations.

• William Blair upgraded Whole Foods Market Inc (NASDAQ: WFMI) to Outperform from Market Perform based on valuation and the benefits of the Wild Oats Markets (NASDAQ: OATS) acquisition; HSBC upgraded shares of Whole Foods to Neutral from Underweight, with a $52 target, and UBS upgraded shares to Buy from Neutral based on the acquisition.

OTHER UPGRADES:

• Prudential upgraded Goldcorp inc (NYSE: GG) to Neutral from Underweight citing the increase in gold prices and a potential increase in Penasquito mine reserves.

• Stifel upgraded QMed Inc (NASDAQ: QMED) to Buy from Hold on improved revenue visibility.

• IHOP Corp (NYSE: IHP) was upgraded at Raymond James to Outperform from Market Perform with a $64 target.

• Bernstein upgraded Commerce Bancorp Inc (NYSE: CBH) to Outperform from Market Perform.

• Stereotaxis Inc (NASDAQ: STXS) was upgraded to Neutral from Sell at Goldman Sachs following its better-than-expected fourth quarter.

• RBC upgraded Labopharm Inc (NASDAQ: DDSS) to Outperform from Sector Perform.

• Morgan Stanley upgraded National Semiconductor Corp (NYSE: NSM) to Overweight from Equal Weight citing improving fundamentals and valuation.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

MOST NOTEWORTHY: Wendy's International Inc (WEN) and NOVA Chemicals Corp (NCX) were today's most notable downgrades:

• Matrix USA downgraded shares of fast-food restaurant Wendy's International Inc (NYSE: WEN) to Sell from Hold to reflect the company's slowing revenues, increasing expenses and valuation.

• CIBC downgraded NOVA Chemicals Corp (NYSE: NCX) to Sector Underperformer from Sector Performer, lowering their target to $27.50 from $31 as they believe margins will be squeezed in 2008 once Middle Eastern supply begins to impact export markets.

OTHER DOWNGRADES:

• Following the company's lower guidance, UBS downgraded National Semiconductor Corp (NYSE: NSM) to Neutral from Buy with a $25 target, while Citigroup downgraded National Semi to Hold from Buy with a $27 target.

• Recent strength in Royal Caribbean Cruises Ltd (NYSE: RCL) forced Bank of America to remove it from their Top Pick list.

• Jefferies downgraded shares of Triad Hospitals Inc (NYSE: TRI) to Hold from Buy pending the buyout.

• JP Morgan downgraded shares of Altiris Inc (NASDAQ: ATRS) to Neutral from Outperform based on the Symantec (SYMC) acquisition.

• Thomas Weisel downgraded Medimmune Inc (NASDAQ: MEDI) to Market Perform from Outperform on valuation.

• Matrix USA downgraded Secure Computing Corp (NASDAQ: SCUR) to Sell from Buy on valuation.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

TheFly began warning in early December that poor performance at many of Motorola's (NYSE: MOT) supply chain partners -- Texas Instruments (NYSE: TXN) and National Semiconductor (NYSE: NSM) -- was likely a sign that Motorola might be set up for an earnings miss.

Late last night Motorola warned revenue and earnings would be lower than estimates. Our take: wait for the market to become oversold and more evidence that the Fed is about to lower rates and then jump in. The next growth phase in wireless will be data and Motorola is well-positioned to participate in this space.

Motorola's miss was more due to a slowing economy and a transition from the mature voice business to data. Motorola, as a company, is in pretty good shape to participate in this transition to wireless data.

When investors' fear picks up due to a slowing economy, jump back into this stock.

Another semiconductor company focused on the communications sector was light on revenue. PMC-Sierra Inc.'s (NASDAQ:PMCS) miss follows a trend we have been blogging about over the past month. National Semiconductor Corporation (NYSE:NSM), Texas Instruments Incorporated (NYSE:TXN), Fairchild Semiconductor International (NYSE:FCS) and a few others have come up short. Jabil Circuit, Inc. (NYSE:JBL) last night also guided to weaker revenue for the current quarter.

It will be interesting to see if we get a pre-announcement warning from any of the big handset manufacturers, such as Motorola, Inc. (NYSE:MOT) or Nokia Corporation (NYSE:NOK).

The big question, of course, is what this means for the sector and for the overall economy in the next few quarters. Is this a recession signal?