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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (20617)	2/7/2005 7:48:07 PM
From: rich evans	Read Replies (4) of 78705

Paul, The problem with the Passive Electrical companies is in one word-- SUPPLY. Growth in overall demand has returned but it is easy to supply this growth. Same with the chip companies. And now the Chinese are coming. Margins keep coming down with about 5% reduction in pricing each year. Since PSR= Net margins x PE, the PSRs are coming down for all the suppliers IMO both from lower margins and lower PEs. The EMS industry is a good example of these problems also IMO. Old PSRs used of 1- 1.2 are no longer applicable. PSRs of .4 to .6 are being used. Growth in EMS has slowed considerably causing a lower PE in the 20 range and Net margins are generally less then 2%. But with VSH, I think you have chosen the best of the lot as to component suppliers. They have a lot of diversity of products. They are number one in resistors and inductors. The power management chip business is supposed to be the best area for the active chip business. Their debt is all converts. They tried to do a billion dollar deal last year and failed. But are still looking. Their chip margins help the low 10% gross margin passives. I personally would stay away from KEM. They are running their plants as cheaply as possible. But no matter what the demand, their profits will be limited by the unlimited supply in capacitors and low margins. And the Asian competitors will keep the margins low and supply high. In fact when I look back to the good old days, before the bust in 2001, I think the mistake was to forget about supply and just focus on demand and expect growth to continue in EMS since penetration in the electronic market was only about 20%. I was wrong. Here we are several years later, growth is much less , margins are low and capacity utilization is still below 70% and in the PCB area, SANM just said they are at about 55-60%. Regards, Rich

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