Investors jump on EMS bandwagon
James Savage; BT Alex. Brown Inc.
Following a challenging first eight months of the year, it appears that investors
are finally realizing the compelling investment opportunity provided by top-tier
electronics manufacturing services (EMS) companies.
Between the Aug. 31 market bottom and Oct. 27, shares of Celestica,
Flextronics, Jabil, Sanmina, SCI Systems, and Solectron rose an average of
55% vs. a 15.4% pickup in the NASDAQ Composite and an 11%
appreciation in the Dow Jones Industrials.
It is increasingly apparent that top-tier EMS companies are on the cusp of a
significant acceleration in revenue and earnings-per-share (EPS) growth as a
result of both short-term and longer-term trends.
Near term, evidence is mounting that OEM and channel inventory-reduction
programs are essentially complete, and despite continuing microprocessor
price declines, overall ASP reductions appear to be moderating. In the longer
term, the overall trend to outsource among previously vertical OEMs appears
to be gaining momentum.
This perspective has been echoed by top-tier EMS companies as well as by
OEMs, both in their third-quarter earnings releases and in discussions at the
recently held BT Alex. Brown Technology Conference, where they forecast
strong growth.
While we believe electronics end markets may have limited growth over the
next year, we are optimistic that multinationals will significantly expand
outsourcing programs, resulting in several billion dollars of incremental revenue
for the EMS sector.
Along with these new programs, we anticipate top-tier EMS growth will be
driven by supplier consolidation. In our view, end-market uncertainty, which is
likely to push increased strategic outsourcing, makes top-tier EMS providers
not only an excellent growth play, but a solid defensive investment as well.
Despite recent price gains, top-tier EMS companies still trade at compelling
valuations based on currently booked business and internal growth. Our EPS
and revenue estimates do not assume major unannounced new program
awards, and, in the likely case that programs are awarded, our estimates and
current stock valuations could prove quite conservative.
Copyright ® 1998 CMP Media Inc.
Their buying for a good reason.patroller
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