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July 19, 1999, Issue: 1169
Section: Business & Finance
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Outsourcing lights fire under EMS stocks
Richard Richtmyer
Electronic manufacturing services (EMS) companies have been heating up on Wall Street recently, and industry observers say there is an abundant supply of fuel feeding the fire behind their stocks.
Bullish investor sentiment for the segment, compounded by its solid fundamentals, should enable EMS stocks to continue gaining ground in the coming months, according to analysts.
"It's increasingly clear that end markets are very strong, and that's going to have a positive impact," said James Savage, an analyst at Thomas Weisel Partners LLC, New York. "But even more important is the increasing perception on the part of investors that the time for outsourcing in the telecom space is now."
Communications powerhouses Lucent Technologies Inc. and Nortel Networks both recently indicated that they intend to move more aggressively toward outsourcing. Under a program it will initiate this summer, Nortel is expected to farm out as much as $1.5 billion worth of its manufacturing.
"This is going to create a whole new phase of growth for these top-tier EMS companies," Savage said. "People are looking forward to very positive earnings releases and very positive year-over-year results."
Benchmark Electronics Inc.'s announcement earlier this month that it intends to acquire Avex Electronics Inc. also sparked investor interest in the EMS segment, noted J. Keith Dunne, an analyst at BancBoston Robertson Stephens Inc., San Francisco.
That deal, which is expected to catapult Benchmark's annual revenue run rate to nearly $2 billion, reflects the EMS segment's underlying strength, and highlights the potential for even further consolidation within the industry, according to Dunne.
"On top of that, you had additional announcements, including [The Dii Group], which recently announced seven new programs worth $200 million," Dunne said. "That brings to over $850 million their new-program wins in the last year. That's double their company size."
Over the past three months, stocks in the EMS segment of the EBN/Thomas Weisel Supply-Chain Index have posted substantial gains. Top-tier and middle-tier EMS companies have risen 21.9% and 20.6%, respectively.
That made EMS companies the stars of the index, and both Savage and Dunne said they expect them to continue to outperform their peers in the electronics industry, with the companies in the top tier remaining slightly ahead of their middle-tier counterparts.
"There probably aren't too many sectors that are growing like this," Dunne said. "The only other one I can think of is the Internet."
Copyright ® 1999
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