GS: EMS Supply Chain Insights: results unlikely
to live up to fears, may = oppty
52-Week Range US$15-7
YTD Price Change -47.06%
Market Cap US$3.5bn
EPS Growth Estimate 15%
What we know so far: (1) Jun-Q data points have been light, particularly s/w; (2) Sep-Q
outlook is likely to be inline, at best, as few mgmts will take a risk (we think previously
bullish mgmts will tone it down, because of what they see in the news, not what they see
in their business); (3) JNPR showed carrier spend is probably fine; & (4) IBM showed
that even with limited share gains, enterprise h/w spending wasn't horrible. As discussed
in our 7/14 preview, our hypothesis is that current data is not a sign of the beginning of
the end, but perhaps a sign that seasonal patterns of the 90s have changed & tech may be
more backended, like in 03. If our hypothesis is correct, we think 05 ests should roughly
hold current levels, which means many tech names may be oversold. Below we detail
EMS names that seem oversold N/T, into earnings (e.g. SANM) and medium term, to year
end. We also provide key OEM exposures to watch for EMS implications early next week
& key OEM exposures that EMS results may foreshadow.
EMS STOCKS:
SANM is down 30% in 4 wks; low expectations are so widespread, mild downward
Sanmina-SCI Corp. Technology
revisions could be a + (like STK); CY05 consensus has fallen from 68c to 52c, near our 50c est and
we don't think there's much downside from here as we've been below mgmt's optg margin guidance
already, so even if they back peddle, we think our ests hold. We don't expect shares above $10 any
time soon, but high single digits from $6.70 is 35% upside with what we think is no more than 10%
downside (if CY05E falls to 40c and trades at 15x, that 's $6); an attractive risk/reward.
FLEX's new report date (Monday, 19th PM) yields comfort & many hope the overhang of a
financing will be lifted. We still don't like somewhat high expectations going into the qtr, but this
too shall pass next week. The key issue that may take months to pass: high handset exposure.
Again, we're comfortable given their customers gaining share, but this is one overhang that could
be around for a while (or reverse if people get enthusiastic on seasonality). For investors, like us,
who believe their handset situation is OK (given half of their exposure is with MOT & Sony
Ericsson, who are gaining share), FLEX is very attractive here, particularly since they often get a
4Q seasonal lift.
CLS has been a big outperformer YTD and 12mo. We continue to think all is well and see upside
to current ests, but we're a little uncomfortable that 2Q expectations are a bit high. SUNW, EMC,
& LU reports before CLS on 7/22 should shed light on top line & hopefully increase comfort.
PLXS is another name like SANM, with low expectations, & shares off 26% in 4 wks. Our ests are
bit below consensus going forward, but that sure seems in the stock here and the risk reward seems
favorable. We think PLXS gets relief when they report Sep-Q with Dec guidance; by then, margin
pressure from new program ramps should abate and hold ests. As a less liquid small cap, macro
pressure has magnified stock impact, but the same should hold true on the upside if we get a tech
rally by year end.
BHE is fine, but they made the mistake of a semi-preannouncement that EPS should be at least in
line with guidance. We think shares are very attractive at $25.50, with $7/share in cash and $1.80
CY05E likely to hold. But again, a questionable IR move makes inline or 1c upside meaningless
this week, but we still see 20% upside by year end.
SLR & JBL are sidelined as they report off cycle (Aug-Qs), so they are a good way to get EMS
exposure and beta, with less risk during this earnings season. SLR has recently outperformed, so
JBL at $22 may have slightly more appeal on a relative basis, near term, but we still see more
upside over 12 months from SLR.
KEY EXPOSURES TO WATCH (OEM reports ahead of EMS):
GS ests of OEMs as % of EMS company revs
FLEX SANM PLXS CLS BHE
(7/19) (7/20) (7/21) (7/22) (7/22)
EMC (7/20) 5% 5% 13%
SUNW (7/20) 8% 33%
MOT (7/20) 5% 2% 5% 2%
ERICY (7/21) 5% 3%
LU (7/21) 4% 10% 5%
TLAB (7/21) 2%
XRX (7/23) 5%
Source: Goldman Sachs estimates.
KEY EXPOSURES TO WATCH (EMS indicator of OEM qtrs)
GS ests of OEMs as % of EMS company revs
FLEX SANM PLXS CLS BHE
(7/19) (7/20) (7/21) (7/22) (7/22)
HPQ 13% 9% 8%
ink jets Europe PCs servers/wkst
CSCO 9%
mid-high end
Source: Goldman Sachs estimates.
I, Stephen Savas, hereby certify that all of the views express |
