from report for which the URL was previously posted:
---visits to SCI Systems, Jabil Circuit, and Solectron; planned visit to Celestica?s Monterrey, Mexico facilities.
"We believe demand for electronics manufacturing services in Mexico continues to be strong with each of the companies we visited having recently expanded or planning to expand capacity. Production of cell phones, set top boxes, and consumer PCs were noted to be particularly strong."
"Component shortages - tantalum capacitors and, to a lesser extent, ceramic capacitors - continued to be a concern with SLR noting the biggest impact. SCI and JBL indicated that although the supply of these components continued to be tight, they were generally able to full their requirements.
"Availability of custom ASICs for set top boxes were noted also to have been relatively constrained but was not identified as a significant concern.
"The supply chain in Guadalajara was indicated to have improved significantly with numerous plastics, enclosure, and packaging suppliers located in the region. The EMS companies we visited hoped for an increase in local printed circuit board and ASIC suppliers to round out the region?s supply chain.
"We are raising our price targets on SCI, JBL, and SLR to $69, $98, and $52, respectively due to increased confidence in these companies strong organic growth expectations. Moreover, we expect these companies to continue to benefit from the increased acceptance of outsourcing among top-tier OEMs and resulting incremental revenue streams. Our top 3 EMS industry picks remain SCI, Flextronics (FLEX, $77 1/16, rated Strong Buy; Risk: High);, and Jabil."
..."Importantly, it was apparent that although Guadalajara continues to be a high-volume manufacturing hub, the complexity of products produced in the region continues to increase."
...SCI Systems Visit (SCI, $50 3/8, rated Strong Buy/SBI; Risk: High)
SCI?s Mexico operations consist of 2 facilities in Guadalajara and facilities
in Monterrey and Mexico City; these operations total 859,000 sq. ft. Over the
past five years, the company?s Mexico operations have grown 68% on a CAGR
basis and by the end of fiscal 2000 revenues from Mexico are expected to reach
$2.1 billion. Growth in SCI?s facilities in the region is expected to
continue at a 35%-40% CAGR in the near term.
SCI management indicated that despite the tight component environment for
tantalum capacitors it has been able to get allocation for these parts and
that availability has improved since the November/December timeframe. Custom
ASICS for set top boxes were also indicated to have been constrained but that
solutions had been developed to minimize the impact. A positive outcome of
the component shortages was reported to be the increased visibility into
customers forecasts and increased backlogs.
Customers in plant #16 (220,000 sq. ft and 38 SMT lines) - a high volume PCBA
facility we toured - included Nortel, Dell, Hughes, HP, Echostar, and Philips.
SCI produces PCBA for the majority of Dell?s Optiplex line of desktop PCs; we
believe that the relationship with Dell continues to improve and that SCI is
winning some additional business.
We are raising our price target on the shares of SCI to $69, a 38 P/E multiple
(1.5 P/E to our long-term earnings growth expectation of 25%) of calendar 2001
earnings of $1.81. We believe that SCI shares continue to be the most
attractively valued among the top-tier EMS companies, representing the most
upside. We expect SCI?s renewed aggressiveness in pursuing OEM asset
acquisitions and rapidly growing telecom and set top box businesses to re-accelerate
growth. We maintain our Strong Buy/SBI rating on the shares.
Jabil Circuit Visit (JBL, $87 7/8, rated Accumulate; Risk: Moderate);
Jabil?s Guadalajara presence consists of a printed circuit board facility and
a systems integration facility that total approx. 400,000 sq. ft. The
facilities are near capacity and are operated in 17 day cycles with 3,000
employees.
JBL management indicated that the component environment has not improved and
that it does not expect a meaningful improvement in the near term. However,
the shortages were reported not to have impaired capacity utilization because
of the company?s commodity teams? ability to negotiate favorable terms with
suppliers and distributors. JBL?s customers in Guadalajara include Cellnet,
Whirlpool, Cisco, Dell, Visteon, and Motorola, with Dell and Cisco
representing over 30% of the locations? revenues.
We are raising our price target on the shares of JBL to $98, a 44 P/E multiple
(1.5 P/E to our long-term earnings growth expectation of 30%) of calendar 2001
earnings of $2.22. Although we believe JBL is well positioned for organic
growth due to its high-value added relationships with top-tier OEMs and strong
communications business, we would look for a strong ramp of the company?s
international expansions or OEM asset acquisitions to accelerate growth and
provide significant upside from current levels. We maintain our Accumulate
rating on the shares.
Solectron Visit (SLR, $43 7/8, rated Accumulate; Risk: Moderate)
SLR?s Guadalajara campus includes 6 buildings of approx. 100,000 sq. ft.
each(600K sq. ft.) and employs approx. 7,000 workers. The company indicated
that its plans for expansion include adding 4 facilities over time to
accommodate growth. The existing facilities were reported to be running at
80%-85% capacity and the company expects to bring on additional facilities
toward year end.
SLR?s management indicated that the component shortages have gated its revenue
growth but that it had recently negotiated improved terms with suppliers. The
company speculated that its competitors likely suffered some line shut downs
as a result of the component shortages. Products produced in Guadalajara
include routers, servers, cell phones, tape drives, and printers. Customers
include IBM, Dell, and CPQ, as well as cell phone customers Motorola,
Ericsson, Ayosera, and Mitsubushi.
We are raising our price target on the shares of SLR to $52, a 44 P/E multiple
(1.5 P/E to our long-term earnings growth expectation of 30%) of calendar 2001
earnings of $1.19. Although we believe SLR remains among the best positioned
EMS companies in the long run, we continue to believe there remains risk to
the top-line guidance for the second half of fiscal 2000 in light of the
continuing tight component environment and need to close sizable acquisitions
on an accelerated basis to achieve the aggressive growth targeted for the
remainder of fiscal 2000. However, the strength of the company's organic
business remains strong and we expect SLR to meet our earnings expectations.
We maintain our Accumulate rating on the shares.
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