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Technology Stocks : Jabil Circuit (JBL) -- Ignore unavailable to you. Want to Upgrade?

To: Asymmetric who wrote (5910)	1/22/2002 6:00:30 AM
From: Asymmetric	Read Replies (1) \| Respond to of 6317

Outsourcing seen making a recovery in electronic sector SCOTT THURM / GlobeTechnology.Com December 26, 2001 In the 1990s, a new breed of niche high-tech companies grew by taking over the manufacturing operations of titans such as Hewlett-Packard Co. and Cisco Systems Inc. But the recent results of these contract electronics manufacturers inspire a new question: Who would want to be in this business? On Dec. 18, former industry kingpin Solectron Corp. of Milpitas, Calif., reported a fiscal first-quarter loss, offered a gloomy sales outlook and saw its credit rating slashed to junk status. On Dec. 20, Jabil Circuit Inc. in St. Petersburg, Fla., reported an 82-per-cent decline in quarterly profit and lowered its fiscal year revenue forecast by $1-billion (U.S.). The three other top-tier contract manufacturers -- Flextronics International Ltd., Sanmina-SCI Corp. and Celestica Inc. -- all recorded losses for their most recent quarters. Despite the rash of bad news, analysts, investors and executives insist that the outsourcing model still works, and say most of the contract manufacturers will return to financial health once business improves for their name-brand customers. Even the latest results may not be as weak as they first appear. Both Flextronics, which is based in Singapore but operated from San Jose, Calif., and Toronto-based Celestica recently said they expect to meet fourth-quarter financial forecasts. And Jabil did eke out a small profit in the quarter ended Nov. 30 while maintaining a healthy balance sheet. "They're still making money, and a lot of their customers aren't and a lot of their suppliers aren't," says James Savage, an analyst at Thomas Weisel Partners. "I think the model is intact. I just think the business stinks." To be sure, the electronics outsourcing business is tough even in the best of times, promising operating profit of roughly 5 per cent, compared with 20 per cent or more for brand-name firms. But executives say that is a fair deal. "You don't need a lot of margin in this business" because research and marketing costs are minimal, says Flextronics chief executive officer Michael Marks. Contract manufacturers are more efficient than brand-name firms because they can buy parts in bigger quantities and shift production quickly among customers and factories to keep assembly lines operating more of the time. The diversification is supposed to shield the outsourcers, and their investors, from the often-volatile high-tech product cycle. That strategy failed this year for two reasons: First, because nearly every tech sector -- from personal computers to cellphones to networking equipment -- turned south at the same time. Second, because contract manufacturers in the past two years had moved aggressively into making telecommunications equipment, which has fallen hardest of all. The result: Industry revenue is projected to fall 2.3 per cent this year to $103.7-billion from $106.1-billion in 2000, according to Technology Forecasters Inc. Pamela Gordon, president of the Alameda, Calif., market research firm, says it will mark the industry's first year of declining sales in at least two decades. "It's easy to get drunk on the revenue opportunities that are out there," says Richard Lane, a senior vice-president of corporate finance for Moody's Investors Service. Mr. Lane says expanding into a wider range of services has saddled the contract manufacturers with higher costs, leaving them more vulnerable to a downturn. The firms that have fared best this year, Mr. Lane says, are those, such as Jabil, that were most cautious about expanding last year. Jabil is the only top-tier contract manufacturer whose debt carries an investment-grade rating from Moody's. Ironically, analysts say the tech slowdown actually may help the contract manufacturers in the long run by pushing brand-name firms such as Motorola Inc., Lucent Technologies Inc. and Alcatel SA to additional outsourcing. Technology Forecasters projects that contract manufacturers will double their share of the global electronics food chain to 29 per cent in 2005 from 14 per cent this year. "It's accelerating," says Alex Blanton, research director for New York money manager Ingalls & Snyder, whose two biggest holdings are Solectron and Flextronics. Mr. Blanton says Solectron has won 18 new projects this year, which will ultimately add $4-billion to $5-billion in annual revenue.