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Strategies & Market Trends : Electronic Contract Manufacture (ECM) Sector -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (2422)	8/30/2000 6:24:16 PM
From: MGV	Read Replies (1) \| Respond to of 2542

Well Paul, I liked it better at $19 a couple of weeks ago. I did some work on it then and thought it was very attractive, especially at that price, which put it at about 18x next year's earnings. In addition to valuation, it is attractive because: 1. It has the magnitude of global manufacturing presence that you must have to compete for the best relationships in the EMS industry. It has operations in Malaysia, Singapore, Spain, Ireland, MA, UT, Silicon Valley, VA, TN, and NC. 2. Its customer base is filled with blue chip customers in strategic markets: IBM, Siemens, ADC Telecom. Palm, HP, MOT, ERICY and some others just as important. 3. It is growing a higher margin comm. biz and its operating margins are expanding (albeit from a relatively low base). It is gaining competitive traction in the PDA market with a strong PALM relationship. It also is picking up RF opportunities for wireless in the PDA market. 4. It has a strong balance sheet. As you know, an attractive part of the ECM industry is the growth that comes from asset acquisitions. A strong balance sheet is all the more a competitive advantage in the ECM industry now. 5. The CEO comes from SUNW and management is well regarded. The less attractive elements of the story include: 1. relatively high customer concentration - IBM comprised 30% of their business, down from 50% a couple of quartetrs ago. 2. It just came public in June and does not have a long enough track record to gauge management, potential seasonality, etc. 3. The float is small because DLJ owns about 50%. For the above two reasons, it probably won't eliminate its valuation discount completely any time soon. But, it should continue to narrow the discount. And, all three detractions are of the type that should diminish over time. Is it a buy here? Well, if it can trade at a mid-20 multiple on 2002 forecasts, it would have a reasonable target of mid 30s. They just made 0.15 and consensus is for .24 in the current quarter. They are expected to show around 40-45% earnings growth through then. if they do, a mid 20s multiple on earnings should be a reachable bogey. Even after a 23% gain in 2 weeks, there is respectable upside.