Passives Hot Even If Cellular Cools
Makers optimistic despite uncertainties
By Bernard Levine
The passive component business should stay red-hot in coming months, even if the cell phone and infrastructure market cools off a bit. Even if nagging component shortages coupled with changing customer tastes prevent the cellular industry from meeting its most sizzling projections, the cellular world and other end-markets should still do pretty well, keeping the business climate torrid for makers of capacitors, resistors and other passives.
That is the message many passives firms are trying to get out. Some leading makers of passive parts, who believe their stock prices have not matched their soaring fortunes in recent months, are signaling their confidence by authorizing stock repurchases.
But some observers note that Wall Street continues to be jittery, looking for any signs that near-term business prospects might be more problematic for component companies as well as cell phone makers and other consumer product OEMs. If back-to-school and Christmas sales indicate demand for electronic products is weaker than believed, it could unleash a flood of component order cancellations, some worry. So far, however, various OEM forecasts and other signs suggest that any slowing of cellular production in coming months will be primarily tied to an inability to find enough parts, not end-customers. And that should spell continued strong results for makers of passives.
"The outlook for the electronics industry is the best we have seen in 40 years," said David E. Maguire, chairman and chief executive officer of capacitor maker Kemet Corp., Greenville, S.C. Last week he was announcing a stock repurchase plan for the company's shares, which, he said, are undervalued.
"We believe the broad-based demand that we are currently experiencing from all market sectors, particularly the Internet and broadband communications infrastructure, could result in one of the longest growth periods in our history," said Maguire. "However, we feel that the current market price of our stock undervalues both the current and long-term earnings potential of the company and presents an attractive investment opportunity for both the company and its shareholders."
Sharing Maguire's optimism and expanding it to the semiconductor arena last week was George Perris of Sierra Marketing Group, Rocklin, Calif.
"I see the passive and active component market continuing on at a very strong pace, at least through the first quarter of next year, even if there are some component order cancellations," Perris said. "Strong global demand for cell phones and other products should continue into the first quarter or longer."
He cautioned parts makers, however, that they should keep a close eye on their book-to-bill ratios. "If the book-to-bill gets to 1.5 or 1.6, that is a good indication of sizable double-ordering."
Kemet's board last week authorized a repurchase program for up to four million shares. The stock was trading around $27.25 per share on the New York Stock Exchange when the company approved the repurchase of its common stock from time to time in the open market. The repurchase will be funded from existing cash and will benefit shareholders by offsetting the diluting impact of the exercise of currently outstanding stock options, Maguire added.
Vishay Intertechnology Inc., Malvern, Pa., has similar feelings about its stock. A few weeks ago, Vishay's board authorized the repurchase of up to five million shares. "We believe our shares are undervalued at the present time in the market and represent an attractive investment. The decision to repurchase our shares reflects our optimism for the long-term performance of our company," said Felix Zandman, Vishay chairman and CEO.
In addition, the Vishay board announced its authorization to lend funds at market rates to members of the board, corporate officers and certain management personnel of the company to enable them to purchase common stock of the company on the open market. Vishay stock was selling around $34 at the middle of last week on the New York Stock Exchange.
Last month Vishay reported on its second quarter, which featured record sales and net earnings. "We continue to see strong business conditions in all of our product lines fueled especially by continuing demand for telecom and other wireless communication devices," Zandman said. "Our direct inquiry with most handheld telephone producers indicates production of more than 500 million phones in 2000 and more than 800 million phones in 2001, compared with sales of 284 million phones in 1999." He cautioned, however, that this depends on availability of components still in short supply.
"Other end-markets such as automotive, computers, semiconductor and industrial equipment, medical devices, instrumentation and even military sales are doing very well," he added.
AVX Corp., Myrtle Beach, S.C., reported record first-quarter sales and earnings last month. "Demand for our products remains extremely strong," said Dick Rosen, chairman and CEO. As a result of this demand, AVX's investments in expanding its production capacity and the industry's favorable pricing environment, gross margins are also at record levels, Rosen said.
"The outlook for the remainder of the fiscal year looks good. Sales will continue to grow as production is increased and this should result in higher earnings," he added.
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