To: Johnny Canuck who wrote (28189 ) 9/13/2000 11:58:27 AM From: Johnny Canuck Read Replies (2) | Respond to SCI Systems (SCI) 55 15/16: If you ever wonder why analysts are reluctant to make bullish calls on a company just ahead of an earnings release, here is a perfect example. Just last week, Bear Stearns analyst, Thomas Hopkins, said investors should ...put significant parts of their portfolios into the contract manufacturing space. In that group, SCI Systems was listed among his favorite plays given that it was still very cheap on a relative basis. Hopkins suggested, too, that investors could buy SCI and make 50% to 100% on their investment. At the time, SCI was trading at 60 1/4, or 34.6x est. FY01 earnings. Today, SCI is indicated to open at 42 1/4, or roughly 30% below the price it was trading at when Hopkins made his comments. The reason for the harsh treatment is that SCI announced an earnings warning this morning for its first, two fiscal quarters. Citing seasonal weakness in consumer electronics and finished PC demand, SCI now expects to earn $0.34 per share in Q1 and $0.42 per share in Q2. The First Call consensus for those periods was $0.38 and $0.43 respectively. Revenues for Q1 were also guided lower to $2.0 bln versus original expectations for sales of $2.3 bln. SCI said it expected sales of approximately $2.5 bln in Q2. Despite the turbulence in the first half of the year, SCI re-affirmed its guidance for the year of $10.5 bln in sales and between $1.70 and $1.74 in diluted EPS. In light of SCI's surprising warning, though, that positive outlook is carrying little weight today-- at least when it comes to SCI investors. The warning, actually, is carrying a lot of weight as it prompted a noticeable downturn in the futures trade since it is expected to weigh heavily on the technology sector. The reason being is that SCI has a diverse customer base, and the assumption is that if business isn't so hot for SCI, it must not be so hot for its customers. SCI derives a majority of its revenues from hardware manufacturing. Accordingly, look for companies like Hewlett-Packard (HWP 111), Compaq (CPQ 31 1/2) and Dell (DELL 37 7/16) to trade lower as each of these companies contributed more than 10% to SCI's revenues last year. Included in SCI's peer group are companies such as Solectron (SLR 46 1/4), Jabil Circuit (JBL 64 19/32), Flextronics (FLEX 82 7/8) and Sanmina (SANM 104 15/16). Finally, SCI's claim that there is weak finished PC demand is a bothersome contention. Investors will recall that USB Piper Jaffray analyst, Ashok Kumar, downgraded Intel (INTC) last week due to continued demand weakness and said he expected PC OEMs to post disappointing revenues this quarter. Intel's stock has yet to recover from that downgrade and neither has the Nasdaq which is down 9.0% since Kumar's controversial call.-- Patrick J. O'Hare, Briefing.com
