November 02, 1998, Issue: 1133
Section: Business & Finance -- Quarterly Financial
Review: Contract
Electronics Manufacturers
CEMs post strong 3Q profits -- Industry likely to show
double-digit growth this year and next
Jennifer L. Baljko
Silicon Valley- Despite the tough times that have left many
companies praying
for recovery, the contract electronics manufacturing
industry has remained
relatively healthy.
Top-tier CEMs such as Flextronics International, Jabil
Circuits, Sanmina, SCI
Systems, and Solectron posted strong third-quarter sales,
particularly from the
PC segment, analysts said.
While some companies reported year-over-year earnings
declines, primarily
because of acquisition-related charges or a slowdown in
orders from a few
major customers, the CEM landscape is likely to see
revenue growth climb
30% to 35% in both 1998 and 1999, said Scott D. Butler,
an analyst at
Pacific Crest Securities, Portland, Ore.
The double-digit growth spurt reflects a surge in
electronic-equipment demand
that dovetails with the increased importance of outsourcing
in the OEM
community.
"The inventory run-off appears to be working its way
through, and we have
seen a nice pickup in demand," Butler said. "Virtually all of
the top-tier
companies have outperformed expectations, and they are
reporting that
visibility is solid going forward."
When market conditions batter OEMs' profits and
margins, outsourcing to
third-party manufacturers becomes a more viable
cost-saving option, he
added. And that obviously bodes well for CEMs.
"We saw a perfect example of that this year," Butler said,
referring to
Compaq's situation last spring. Surplus inventory had
forced the company to
close its large assembly operation in Houston. Compaq
then shifted the
manufacturing functions to a couple of CEMs, he said.
Nearly 80% of the projected sales growth pegged for
CEMs will come from
this outsourcing trend rather than from increased equipment
unit demand, said
J. Keith Dunne, an analyst at BancBoston Robertson
Stephens, San
Francisco.
"An unprecedented number of top-flight OEMs have
indicated greater
intentions to outsource, including Alcatel, Compaq,
Ericsson, HP, Hyundai,
IBM, Lucent, NCR, Nortel, Philips, Samsung, and Sun
Microsystems,"
Dunne said.
As outsourcing gains momentum, consolidation within the
industry is also likely
to increase, analysts said.
CEMs have expanded primarily by purchasing
OEM-divested assets. But
there has been some recent merger and acquisition activity
within the industry,
which is likely to continue as stock valuations fluctuate. For
example, Sanmina
Corp. agreed to acquire Altron Inc. for $226.6 million in
September
"As worldwide economies adjust to the likely changes in
business conditions,
we believe the opportunity exists for consolidation among
privately traded and
private EMS [electronics manufacturing services]
suppliers," said William E.
Cage Jr., an analyst at J.C. Bradford & Co., Nashville,
Tenn.
Copyright ® 1998 CMP Media Inc.
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