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

To: jeffbas who wrote (955)	12/11/1997 10:27:00 PM
From: kolo55	Respond to of 2542

Try reading the post again- that was posted after the close. I didn't do a good job organizing my post, but the second news release (that you are quoting) came out after the stock dropped. And the release clearly says that they will meet analyst earnings expectations for the current quarter. I think the stock cratered based on the personnel change announcement. When stocks drop 25% in one day based on a personnel announcement for people not even at the top, then I believe things must be getting into the "fear and loathing" stage. As for K*TEC, I think they are just suffering through what some of the reduced growth expectations that other domestic ECM are going through (like ACTM). The sector will still grow 25+% a year, but most of that growth will go to the bigger players who stand to pick up the international growth in places like China, Mexico, Brazil, and Eastern Europe for customers selling to the Americas and European markets. You asked: - do you think this is a company specific problem or do you think that the so-called 25% industry growth rate is overstated or being more than met with increased or underutilized Asian capacity, with a shakeout of marginal players and lousy margins for everyone in store? (That is what the stocks are saying.) Again, I don't think that is what the stocks are saying at all. Its not an "excess capacity" problem that the markets are worried about now, its a "reduced demand" problem. I don't see many signs that excess Asian manufacturing capacity is driving ECM pricing and margins down. In fact margins are improving as overhead at most ECM companies get spread over ever larger revenues. The market is bashing ECM stocks when the customer companies warn of bad earnings. The problem is that most of the earnings warnings are based on margin pressure (the HDD makers, some cellular phone makers) but the same customers still expect strong unit growth and even revenue growth. Sometimes the warnings are about products that aren't even manufactured by the ECM stock that is hammered (Solectron and Jabil got bashed when 3Com announced their USRobotics modems weren't selling, even though neither makes the modems). Today Jabil got hammered simply because Quantum says they can't make the new model DLT tape drives fast enough to avoid a "leveling" in revenues while they transition to the new model. Quantum still sees 100% growth in revenues for that product over the next year. The market is panicking, thinking that short term earnings problems at the customers, in spite of strong unit growth, will hurt the ECM players. I don't think it will much. First, the ECM companies get paid mostly on "unit growth". Secondly, the overall secular trend is too strong, and customer margin pressures simply pushes them to outsource more. I really think that the market is mis-interpreting the signals this time around, but again, I tend to be contrarian on these kinds of calls, trusting my own analysis more than ST market trends. JMO, but we will find out if I'm completely wrong next week. As for Kent, their main business is the distribution business. The price drop today was absurd. Of course, I never understood why a distributor like this should trade at over 30 times earnings like KNT did when it sold at 40 in early September. Maybe I should play the short side some. Paul