An interesting article stating that the business model of cpq trying to do everything herself is flawed. CPQ is trying to be everything and ends up good at nothing !
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"A SILVER LINING IN TECH" - SmartsMoney
DON'T PANIC! It's just the end of the tech sector -- or so it
seems. The broad selloff in technology stocks following last
week's dismal earnings pre-announcements by Compaq
Computer (CPQ) and Intel (INTC) has had a back-draft
effect, pulling down prices for tech stocks across the board.
But rather than run for some defensive sector like consumer
products or drugs, why not do a little bargain hunting.
One sector in particular that may have been wrongly
implicated during Monday's carnage is the community of
contract manufacturers -- Jabil Circuit (JBIL), Solectron
(SLR), Flextronics International (FLEXF), Smart
Modular Technologies (SMOD), Adflex (AFLX), and
DII Group (DIIG). All of them dropped more than 5%
Monday in the 28% Nasdaq plummet.
These companies are paid by PC makers and other
computer equipment vendors to assemble various parts of
their finished products on an outsourcing basis. It's all part of
what analysts are calling the "battle of the supply chain,"
where speed to market is the key ingredient for success.
"You want to grow from raw materials to cash as fast as
possible," says Cowen & Co. analyst Robert Stone. And if
using an outside contractor helps you build parts more
quickly, then you'll pay up for the privilege.
While it comes as a jolt for the whole market, Compaq's
news last week actually highlights the growing opportunity
for contract manufacturers. The truth is, as companies like
Compaq and Hewlett-Packard (HWP) struggle to emulate
the success of Dell Computer (DELL) and its
build-to-order model, they'll need all the outside help they
can get.
Analysts are now pointing to the foolishness of old-style
inventory management. They note that Compaq had to stuff
its distribution channel full of inventory to puff up its fourth
quarter numbers, only to suffer shelves of expensive unsold
inventory in the first and second quarters of this year. The
key to reducing that inventory, analysts say, is to foist some
of the manufacturing responsibility onto outside companies.
Stone points out that Compaq manufactures 80% of its
circuit boards in-house, whereas Dell, the leader in
build-to-order, has no in-house circuit board assembly.
Switching to the Dell model, he says, would save Compaq
millions.
How do the contract manufacturers make it work? Consider
the case of Smart Modular, which manufactures memory
subsystems for Compaq computers. The trick is that Smart
Modular's systems are installed by Compaq's distributors
only after a PC is ordered by a customer. That means even if
Compaq stuffs the channel, it doesn't matter to Smart
Modular. The contract manufacturer benefits from each PC
sold to an actual customer, not from machines sold to a
distributor.
Of course, an overall slowdown in PC demand crimps sales
for everybody. But so far, there are more signs of pricing
pressure than weak unit demand. Stone says the quarterly
reports that will come from these companies in the next
couple of weeks may reflect some sluggishness, because
many PC buyers are holding off purchases until after April
when new technology comes out. But he's bullish on the rest
of the year.
Besides, many of these companies are far from dependent
on the PC market. Jabil Circuit, for instance, gets most of its
revenue from networking companies like Cisco Systems
(CSCO) and 3Com (COMS). Yet its stock plunged 12%
on Monday and now trades at 18 times 1998 eranings
estimates, despite the company's 31% projected long-term
growth rate. J. Keith Dunne, an analyst with BancAmerica
Robertson Stephens, points out that Adflex -- which earns
the bulk of its revenues from consumer electronics and
communications products -- also got hit unfairly. It's trading
at only 10 times forward earnings after today's drop.
Given that there's still plenty of volatility in the market, Stone
recommends waiting until the first-quarter earnings season
passes before jumping into the contract manufacturing arena.
The stocks are cheap, but any softness in the first-quarter
numbers could make them even cheaper. "Don't make the
mistake of evaluating these companies based on sentiment
about their customers," Stone says. "Look at their
fundamentals, which are good for the next 12 to 18 months."
-- By Tiernan Ray
Mang |
