Contract manufacturing stocks got a boost last week --
when Thomas Weisel Partners analyst Jim Savage theorized that they could grow earnings smartly, even without a big pickup in hardware demand.
Indeed, Savage says his firm takes a dim view of the immediate prospects for tech spending. But the key issue for the contract manufacturers is that production levels last year ran well below end-market sales. In short: A huge surplus of raw materials, work in progress and finished goods has been tamed.
"Production levels are beginning to rise, and EMS companies are getting better visibility on production, which means they can plan more effectively," he says. "Inventories at the top-tier companies in the business are down 35% since the end of the 2001 first quarter." Ingram Micro, he says, has seen inventory drop from 35 days to 27 days, near historic lows.
Savage adds that there's been a pickup in new-product development in servers, routers and storage. And he says the contract manufacturers have cut capacity on average by 25%, closing inefficient plants and moving some production offshore, all of which should help margins.
Jabil Circuit is Savage's top pick in the group, although he also like Sanmina SCI and Celestica. Jabil, he says, has been gaining market share with large customers like Cisco, while also adding some higher-margin business with new customers like Agilent, Nokia, Qlogic and Tellium. Savage expect steep profit-growth in coming quarters: 8 cents in the company's February quarter, 13 cents in the May quarter and 20 cents in the August quarter. For the August year, he expects 52 cents a share, with $1.05 in fiscal 2003. Jabil, he figures, could hit 30 in the next 6-12 months; last week the stock closed at 21.22, up 98 cents.
(Eric Savitz/Barron's/Feb 18) |
