Hi Paul has anyone heard this before. Top-tier CEMs take the checkered flag
David T. Parrish; Advest Inc.
Contract electronics manufacturers closed out 1998 on a high note.
The Advest Contract Manufacturing Universe, an equally weighted stock
index, rose 77% during the December quarter to finish the year up 25%.
However, the gains were far more significant with the top-tier manufacturers in
the group, such as Celestica, Flextronics, Jabil Circuit, SCI Systems,
Sanmina, and Solectron.
Shares of these CEMs rose an average of 85% during the year, while the
remaining contract manufacturers were down an average of 11%. If we take it
one step further and exclude two of the larger and better-positioned
second-tier companies- Benchmark Electronics and Plexus-the average return
falls to -38% for the year.
The big question is why. Most major OEMs are seeking partners that satisfy
several criteria: They want CEMs that can simultaneously produce the same
product in different markets of the world at a competitive price; and have a
large revenue base, so the placement of large programs won't represent an
inordinate percentage of their revenue.
They also want CEMs that have the financial strength, technological expertise,
and depth of service to support their requirements today and in the future.
These are some of the primary factors attributable to the success and
appreciation of the top-tier manufacturers.
This is not to suggest that the smaller, second-tier players are destined for
failure; it's just that it's much more difficult for them to thrive. Second-tier
players have to find a market niche they can protect. And market niche is not
synonymous with low-to-medium volume, because we are seeing several
larger CEMs expanding their offerings to address this segment of the market.
The long-term prospects for the contract manufacturing industry are quite
favorable. The now firmly established trend toward outsourcing and continued
penetration of offshore markets should provide a solid foundation for strong
earnings growth, with large CEMs being the greatest beneficiaries.
However, given the aggressive assumptions we believe are factored into
current valuations, we are moderately concerned about the potential for a
slowdown in equipment spending as Y2K approaches.
Copyright ® 1999 CMP Media
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