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

To: jeffbas who wrote (863)	11/12/1997 10:17:00 PM
From: solderman.com	Read Replies (1) \| Respond to of 2542

I think someone hit it on the head earlier when they talked about overcapacity issues affecting ECMs over the coming months (a la SFLX). ECMs have invested a lot of money over the last few years in new capacity that is geared to handle increased volumes. No one doubts the trend toward outsourcing will continue, but the question is how the slowdown in Asia and other parts of the world will affect these companies. My guess is that slowing (not necessarily negative)demand for technology products in the near term could cause some OEMs to lighten the load they impose on the ECMs, which would directly affect ECM output and profitability. No one wants to carry empty plants and equipment that are not producing income. If the ECMs do slow down, and earnings are affected, the multiple expansion of this past year could reverse and begin to contract. Remember that historically this has always been a cyclical business and that the biggest players at times traded at a discount to the broader market. All that has changed since the world discovered the ECM industry. The contracts the ECMs enjoy with OEMs are easily cancellable or terminated with very little notice, if any at all. This is mentioned as a risk in every SEC form these companies file. Who's to say that if JBIL turns 1.85 a share for 1998 (vs expectations of 2.15 ish) as a result of slowing demand or cancelled contracts and the multiple contracts to reflect slower growth (say to 15x earnings) that the stock could not retrench to 30? Who's to say that if in order to keep plants humming, ECMs get more competitive and margins shrink,that the stocks won't pay the price? You'd be foolish not to consider the possibility. All that being said, I am firmly convinced that if you could stay on a desert island for the next 3-7 years, ignore the market's day-to-day movements, and held on to the quality ECM stocks, you'd be a happy camper. It's just that if the problems we are hearing about in Asia (as well as from some domestic comapnies like 3COM) begin to manifest themselves in a concrete way over the next little while we could still see a serious correction in ECM stocks, even from these already-corrected levels. A retracement from here is looking very likely at this point. JMHO.