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Analysts chant 'buy' SCI Systems
By Barbara C. Costanza, CBS MarketWatch
Last Update: 5:26 PM ET Apr 30, 1999Earnings Surprise
Short Takest
HUNTSVILLE, Ala., (CBS.MW) --Analysts have been pounding the table lately for SCI Systems, a computer components manufacturer that saw its shares chopped nearly in half between January and early April.
The company is being touted as a turnaround play and got another boost from third-quarter earnings of 48 cents a share, 3 cents ahead of the revised consensus estimate, after the market closed Wednesday.
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But at least one brokerage firm is holding back, saying the company's future earnings prospects aren't that clear, leaving clueless investors to wonder whether now is the time to jump in, or get out.
"Value buyers may want to play, but lack of [earnings] visibility into fiscal 2000 keeps us neutral" SG Cowen's analysts Robert Stone and Amy Lubas said in a research note.
Five analysts raised their rating on the stock Thursday, a day after the earnings report, citing improved operating margins, a lesser impact from the Brazilian real devaluation and a slightly lower than expected tax rate.
In addition, Morgan Stanley began coverage with an "outperform" rating and a price target of $45 a share.
March madness
That's in contrast to March when a warning about the company's earnings sent analysts scurrying to downgrade shares.
Needham and Company's analyst John McManus has stuck to his "strong buy" rating on SCI throughout the recent rough patch. He says the company has shifted its product mix, taken an aggressive stance on acquisitions and is virtually debt free. McManus believes the stock is cheap, considering the exploding contract manufacturing industry and its movement to telecom industry outsourcing.
McManus said the company started expansion plans that cut into operating margins in the just completed quarter, in turn lowering earnings. McManus along with CIBC Oppenheimer's Michael H. Zimm believe future revenue and earnings growth will stem from the number of new large contracts still in development.
Cautious outlook
Stone and Lubas acknowledge margins have returned to an uptrend but worry because 50 percent of SCI's revenue comes from sales to personal computer makers.
Fierce competition in that sector is putting pressure on suppliers and new ordering patterns could also pose a problem
The analysts also noted that company management is going through a transition, with new chief executive officer Gene Saap not due to assume full command until the end of the June quarter.
And while Zimm remains positive on the long-term prospects for the company, he acknowledges that declining component average selling prices in the PC market put SCI at above average risk in the near term.
Shares (SCI: news, msgs) closed down 1 5/8 to 38 3/8 Friday. See Big Charts
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Barbara C. Costanza is a reporter for CBS MarketWatch.
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