I'd say Cowens is more than a little late.
With these stocks trading at 9-12 times earnings, the market is
valuing these stocks like moderate cyclicals, whose earnings will
almost completely disappear in a moderate downturn. And given the
attention some of the smaller domestic players have gotten as their
revenues have flattened and dropped and their earnings dropped
significantly, one could almost give creedence to this theory.
However, my work suggests that this theory is wrong. I expect that the
worst that could happen in a moderate downturn is a reduction in
sector revenue growth to say 15% instead of 25%. In order to see
sector revenues actually drop, we would need a severe
recession/depression, say a 15-30% drop in GNP over several years. In
this kind of recession the electronics goods sector (including buiness
and consumer electronics), would decline say 5% a year for several
years, instead of growing about 5-10% a year. This would wipeout the
15% a year growth the sector is getting due to outsourcing, and the
ECM sector would see flat revenues in that case. But this is an
extremely unlikely scenario, given the weakness in commodity markets,
the current budget strength in Washington, the ability of the Fed to
head off a deep long recession by lowering interest rates etc.
Now, lets look at reality. It would be interesting to take the major
public ECM assemblers, and compare the latest Q revenue run rate
versus the 1997 calendar year revenues. The top public assemblers will
have approximately these revenue numbers:
Run Rate Projected Growths
Company Last 97 Q 1997 Rev Run Rate Growth
SCI 2000 est 6600 8000 21%
SLR 1137 4023 4548 13%
JBIL 320 1095 1280 17%
FLEXF 300 est 707 1200 70%
DIIG 235 est 769 940 22%
PLXS 100 est 400 400 0%
IECE 90 est 305 360 18%
BHE 87 est 324 348 7%
ACTM 65 est 269 260 -3%
CMCI 60 est 267 240 -10%
Total Group 4394 14759 17576 19%
Including Announced Outsourced Deals
Company 1997 Rev 1998 Rev Growth
SCI 6600 9500 44%
SLR 4023 6100 52%
JBIL 1095 1330 21%
FLEXF 707 1450 105%
DIIG 769 1150 50%
PLXS 400 400 0%
IECE 305 360 18%
BHE 324 348 7%
ACTM 269 260 -3%
CMCI 267 260 -3%
Total Group 14759 21158 43%
Including Probable Growth in Key Customer Accounts
Company 1997 Rev 1998 Rev Growth
SCI 6600 10000 52%
SLR 4023 6600 64%
JBIL 1095 1610 47%
FLEXF 707 1500 112%
DIIG 769 1300 69%
PLXS 400 480 20%
IECE 305 410 34%
BHE 324 410 27%
ACTM 269 320 19%
CMCI 267 260 -3%
Total Group 14759 22890 55%
In the first section, if we see 1998 revenues flat at the latest Q run
rate, we will see the sector revenues grow about 20% calendar 98 over
calendar 97. This would include the downturn in revenues at the
smaller domestic players like ACTM, CMCI, Plexus etc...
In the next section, if we add in the known additional outsourcing
business that is coming down the pike, like the new NCR business for
SLR ($1.2B), the new HP business for SCI ($1.0B), the new European
business for FLEXF ($0.3B), the new Gateway business for Jabil, the
new IBM business for DIIG, the new Ericsson business for
SLR,SCI,FLEXF($2.0+B) etc ..., then I get a revenue growth of over 40%
for the group.
Finally in the last section, if I use some publicly forecasted growth
rates for some of the key customer accounts, like 100% year over year
growth for Quantum's DLT business for Jabil, and 30% growth in Cisco
and 3Com business, and some base business growth for the other
accounts, I get revenue growth of over 50% year over year for this
group of companies.
Now the actual EPS won't grow that fast, and the rate earnings do grow
depends on margin forecasting, and I let everyone take their own shot
at that. Also, revenue growth isn't the primary determinant of stock
price. For example, Jabil is going to grow about 40% (excluding any
acquisitions), but since this growth is primarily being driven by
higher margin high growth customers, the implied impact on EPS is
large. FLEXF will grow over 100% due primarily to several
acquisitions. But FLEXF will have the debt burden and 40% more shares
out, and this will reduce EPS growth rate well below that rate. So
these numbers aren't useful for identifying the best stocks. We really
need to look at each stock in detail.
But the idea that the ECM sector will see a poor revenue growth year
flies in the face of the recent announcements and these numbers. Some
people are looking at the small ECM players who are having trouble and
extrapolating the problems to the entire group. In reality, the big
deals announced by the big players have already pretty much guaranteed
that 98 will be a 30+% growth year. And given that smaller deals are
less visible, and mergers and acquisitions will almost certainly occur
as well, then there is a good chance this could be an extraordinary
year for the sector, with revenue growth topping 50% for this group.
Most of the revenue growth will go to the top players.
Even the smaller players could do better than I have shown. Presumably
if the larger players are getting the larger contracts and expanding
overseas, this leaves a lot of room for the smaller $10-30M annual
contracts to go to the smaller players.
These are approximate numbers, so don't take any one company and use
the numbers for that company as accurate. I simply wanted to show that
I think this sector group will almost certainly grow 30+% this
calendar year over last calendar year.
Paul
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