Swing trading this group would be the best way to go if one can maintain a position for when we ultimately rise on renewed orders. Interesting article on the EMS sector stocks. These companies would be big customers of the chip equipment crowd. I'm watching JBL for a return to around 18 in the next 6 weeks.
A Contract Sport
yahoo.smartmoney.com
By Cintra Scott
June 11, 2001
ONE SECTOR THAT HAS ESCAPED this year's tech typhoon has been electronics-manufacturing-service companies, or EMSs. The thinking: As the likes of Cisco Systems (CSCO) and Nokia (NOK) reduce their own manufacturing capacity, they'll farm out some of their production to these factories-for-hire to make up some of the difference at a better price.
But after jumping almost 70% in hardly more than two months, the typical EMS stock may no longer be a bargain, says Merrill Lynch's Jerry Labowitz. The recent bounce is one reason Labowitz cut his near-term recommendation for seven EMS-ers to Neutral on Monday. The septet was devastated in trading as a result: Celestica (CLS) fell 7%, C-Mac Industries (EMS) fell 8%, Flextronics International (FLEX) fell 7%, Jabil Circuits (JBL) fell 9%, Plexus (PLXS) fell 5%, Sanmina (SANM) fell 7% and Solectron (SLR) fell 8%.
But while Labowitz spread pessimism about the group's near future, he also reiterated his long-term optimism about the group. Why? Labowitz thinks outsourcing will become increasingly popular among cost-conscious tech companies in the future.
Over at Bear Stearns, fellow EMS analyst Thomas Hopkinsm couldn't agree more. Based on an extensive Bear Stearns study, the Wall Street Journal All-Star analyst estimates that EMS revenues could increase by $25 billion over the next 12 months, which would bump up future earnings estimates significantly. Hopkins thinks Lucent Technologies (LU) alone might bring the EMS industry $1.5 billion to $2.0 billion in new revenue this year.
But that's where the similarities between the two analysts end. Not to put too fine a point on it, Hopkins calls the Merrill downgrades "nonsense." Here's where the two analysts disagree.
Labowitz is encouraging investors to take profits immediately, because he expects the EMS group to sound the sirens in the coming weeks. Given the slump in telecom and computers, these manufacturers' customers are selling less of their gear, whether they make it themselves or they outsource it.
Those reduced manufacturing needs will translate into lowered EMS earnings estimates, in his view. As a result, Labowitz thinks the industry's stocks could revisit their 52-week lows — which are about 70% lower than current market prices — soon. "I can't sleep well at night," Labowitz says. "I've been at this for 28 years, and it says something when I can't sleep well at night." At their current valuations, EMS stocks have "gotten ahead of their fundamentals," he explains. They trade at an average of 26 times his 2002 earnings estimates for the rest of the year, despite that theirs is a relatively low-margin business. And Jabil Circuits, for one, trades at 35 times Merrill's 2002 earnings estimate.
For his part, while Hopkins has near-term reservations about two EMS companies he follows — Solectron and Sanmina — he thinks most of the group is on track despite economic woes. And even more important, Hopkins thinks investors who ignore the group now will miss out on a great 12-month run, as earnings estimates climb with new contract announcements. (It should be pointed out that Flextronics, one of six EMS stocks Hopkins rates a Buy, is a recent investment-banking customer of Bear Stearns.)
Why is Hopkins so enthused? "The downturn is here, everyone knows it," he explains, so investors should look at the long-term view instead. That $25 billion in new revenues he forecasts in the next 12 months reflects his conviction that EMS companies don't have to wait for their customers' markets to improve. Instead, they can bank on the broader outsourcing trend to bring in new revenue ahead of the rest of the tech sector.
Hopkins' 150-page report on this burgeoning outsourcing explosion, released Monday, is based on an extensive survey of EMS customers, including computer makers, data networkers, telecom-hardware manufacturers, consumer and other electronics makers. The survey's 105 respondents boast a combined $795 billion in sales and $2.5 trillion in market capitalization. Some 85% said they expect to increase their outsourcing contracts within the next 12 months. As a result, Hopkins thinks the industry's 2002 earnings will be 48% higher than 2001's.
Labowitz, meanwhile, estimates that EMS earnings will increase by 24% over the same period. While that's only half Hopkins's growth estimate, it's certainly nothing to sneeze at.
So what should an investor interested in EMS do? "It just depends on your time frame," Labowitz says. If you're investing for the long haul, EMS stocks may turn out to be A-OK. |
