I'm a bit leary of CMCI.
This is at least the fourth domestic small cap to report disappointing growth due to a customer problem. First, ACTM took the hit on the loss of 3Com. Then K*TEC, a division of Kent Electronics (KNT) announces that ECM revenue growth will be smaller than expected. Then Plexus(PLXS) loses some Motorola business. And now CMC Industries reports they are losing Micron (MUEI).
I am not surprised these companies have encountered customer turnover problems, but I am surprised at how much their stocks have gotten hit. They all fell 60-80% off their highs. This seems pretty extreme for reporting flat revenues for a while until they fill their capacity with new customers. And I think they will; the sector revenues are still growing stronger. But these stocks seem to lanquish for quite a while after these hits (2-3 months). So I expect it will take a while for CMCI to recover from this hit, and replace their largest customer (22% of revenues).
I am suspicious of the timing of the CMCI announcement today, on the last day of the year. Looks like a long term contract expiration. I suspect CMCI knew this was coming long ago. Two analysts just upgraded CMCI last month with the stock over 11; they are probably feeling a bit shellshocked today. My guess is that CMCI management lost some credibility and it will be a while before they earn it back.
I am even more surprised that the CMCI news knocked down the other larger ECM players. The MUEI contract is small potatoes compared to the large outsourcing contracts announced lately. The Ericsson, Phillips, etc outsourcing in Europe set in motion this fall will probably add $3-4B to ECM sector revenues this next calendar year. The NCR deal with Solectron will add $1.2B to sector revenues. Then ther is Gateway's decision to contract business with Jabil instead of expanding internally, and some additional outsourcing done by HP recently. The sum total of the four canceled/moved contracts mentioned above for the small domestic players is less than $300M, and only the Motorola business they pulled back from Plexus is leaving the sector revenue stream. The rest is just moving from one player to another. (MUEI had their own ECM business, which I understand is being/was sold recently, and so perhaps this business is going to whomever is purchasing their ECM business.)
In summary, people who look at these recent announcements from these companies and forecast significant slowdown in ECM sector growth, are way off base. Given the continuing ramp in construction of greenfield plants by SCI, SLR, JBIL, FLEXF, DIIG, etc, and the fact that I don't beleive these facilities would be built without firm customer commitments, and the large new outsourcing contracts announced this fall, seems to almost guarantee significant ECM sector revenue growth next year. I expect SLR, JBIL, FLEXF, and DIIG to grow revenues at least 40% calendar 98 over calendar 97. And SCI to grow at least 30%. If that happens, these stocks should all do well.
Paul |
