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

To: Sam who wrote (2524)	5/4/2002 1:13:12 PM
From: rich evans	Read Replies (1) \| Respond to of 2542

Hi Sam and Paul S. and STeve: Here is my take on the industry which I posted on another thread. What do you think? Studio, I agree with you. CLS presentation(CEO) also agrees. The Dell model for EMS is the goal.Cash recycle =0. SLR said 4-6 quarters to meaningful upturn but things stabalized. CLS said 5 quarters but things substantially stabalized. So what are the new values. Old values were PSR of 1 to 1.2, PE of 35, Growth 40-50%, Net margins of 3-4%, all higher for SANM and lower for SCI. Now they are in the pack. New PSRs = .5, PE 25, Margines=2%.Now we have stated growth by SLR, JBL, CLS , FLEX of 25%. Pegs were always about 1. So FLEX at 50 cent earnings selling for 12.5. CLS at 1.00 selling for 25. PSRs are now .5. Why? PE x net margin = PSR so 25 times net margins of 2%= .5 psr.Marks of FLex saw it last quarter and said they were going to concentrate on profits and they have, doing what you suggested as to margins,DSO,I/T etc.Just in time inventory is the watchword with suppliers doing VMI at Flexs industrial parks. So CLS and others says flat for next two quarter and maybe as much as 5 quarters . But growth 3 times present revs in 5 years.This equals 25% about growth but the curve is not straight line but curved. SLR says EMS plus ODM equals 230 bill with EMS about 130 bill of that. This is 28% penetration of a 800 Bill market growing at 6-8%.SLR says market in three years is 1.2 trill and 40% penetration equls 484 bill. How much is ODM is question and the analysts keep asking about that. Still the Japanese are supposed to be 20-25% of electronics market. Question- are the gross numbers including the japanese or are the japanese part of the 800 bill. If so penetration by EMS-ODM higher on the non- Japanese portion and growth prospects less. Japanese are supposed to be the fourth wave of growth after NA,europe,Asia. But progress is slow although NEC did deals with SLR and CLS. Anyway with slower future growth, lower PEs, lower PSRs , several quarters of stabalization before growth again, and margins at 2% net for the best guys , This explains to me the present EMS stock prices and fits them perfectly except for JBL (a special case). When the EMS guys do what you say as to efficiency then maybe higher valuations. This is tough job though. Takes a lot of information technoloy throughout. With material 85% of COGS, it has to be done there like Dell, there just isn't room in the value add side of people/plants/-service to get these efficiences. Maybe that is why 3 of the EMS went to the vertical model. More profits when sales return, but in the meantime CLS and JBL are performing better in this enviroment with no heavy overhead from PCB, enclosure, etc. When things improve, I think a PSR of about .75 to .8 is in order so I am figuring upside from that metric. Cheers Rick