Way to go Creditman,anyway here's the artical. Finding Bargain Stocks Behind
Famous Nameplates;
Software Titans Engage in a
Knock-Down, Drag-Out Fight
By ERIC J. SAVITZ
Things aren't always what they seem. Say, for instance,
you were to buy some computing gear from Cisco
Systems, Hewlett-Packard or Sun Microsystems. You'd
likely assume, if you even stopped to think about it, that
the hardware you'd bought had been manufactured by
the company that put its nameplate on the front. As it
turns out, however, there's a pretty good chance you
would be wrong. And the same goes for products from
companies like Apple Computer, IBM, Lucent
Technologies, 3Com, Bay Networks, Silicon Graphics,
AT&T and Ericsson. To one degree or another, they've
been farming out manufacturing of key products to
outsiders.
In short, business is booming for the oft-ignored,
unglamorous technology sector called contract
electronics manufacturing. Frost & Sullivan, a Mountain
View, California-based research firm, earlier this month
forecast 26.1% compound growth for the contract
manufacturers stretching out to 2004. By the end of that
span, they project, the industry will have revenues of
$110 billion. Want more evidence? Consider the recent
performance of Solectron, of Milpitas, California, one of
the largest players in this fragmented field. In its fiscal
first quarter, ended November 28, Solectron reported a
41% increase in sales, to $1.1 billion, as pershare
earnings improved to 38 cents, from 29 cents. Though
estimates were a tad higher, the stock had sold off
ahead of time, and it actually rebounded nicely on the
news. Investors, in particular, were encouraged by
Solectron's observation that its results had not been
affected by the Asian currency crisis.
Even with the post-earnings bounce, though, Solectron's
stock, now trading in the high 30s, sits more than $10
below its October peak. Alexander Blanton, an analyst
at Ingalls & Snyder, a New York investment boutique,
thinks the stock market has dished out unreasonable
punishment to the shares of contract electronics
manufacturers. That goes not just for Solectron, but also
SCI Systems, the leading contract manufacturer for the
PC industry, and a host of smaller companies, including
Flextronics International and DII Group.
Wall Street seems convinced that these companies will
suffer severe consequences from the ongoing Asian
economic crisis. As Blanton observes, however, while
some of them run facilities in the Pacific Rim, they
operate them mostly for Western companies, selling and
buying goods in dollars and European currencies.
Blanton says they should feel little bottom-line impact-if
anything, they will benefit from reduced labor costs.
Meanwhile, the news on the industry continues to remain
uniformly positive. Not long after the solid earnings
report from Solectron, rival Jabil Circuit likewise came
through with a market-pleasing quarter. And there's
additional evidence of the growing move toward
contract manufacturing: NCR this month agreed to
outsource its computer-manufacturing operations to
Solectron for at least five years; Solectron will acquire
three NCR facilities, with 1,200 employees.
Waxing Enthusiastic
"The business outlook for these companies has been
getting better and better, particularly in Europe," Blanton
enthuses. "These companies are now doing all kinds of
activities beyond circuit-board assembly, which is where
the industry started. Some of them are full-service
facilities, providing design and engineering services,
packaging consulting, test development, prototyping,
procurement, board assembly, software duplication,
order fulfillment. You can start a tech company now and
not do any manufacturing."
The contract-manufacturing stocks, he says, boast
strong, steady, predictable growth. Blanton figures they
deserve to trade for a price-to-earnings multiple at least
equal to their annual growth rate -- but none of them do.
Solectron, he notes, trades for about 24 times expected
calendar 1997 earnings of $1.47 a share. In 1998, he
says, profits should jump to $1.97 a share, an increase
of nearly 35%, making for a below-market P/E of 18.
Blanton likes both Solectron and Flextronics, but his
favorite stock in the sector is the aforementioned DII
Group, a smaller company that trades for an even lower
multiple. DII has some unused manufacturing capacity,
giving it considerable operating leverage.
SCI Systems, Jabil Circuits and Sanmina, he says,
aren't quite as cheap. Nonetheless, all of the stocks in
the group trade at a discount to the industry's growth
rate. The bottom line: Blanton sees strong prospects for
all of these stocks: "Growth is going to be huge."
Charles Cory, who heads Morgan Stanley's high-tech
M&A group, expects to find plenty of work in 1998. In
particular, he foresees consolidation in three key parts of
the tech landscape: software, communications equipment
and computer hardware. Software, he observed over a
recent breakfast in Palo Alto, "is the space that's all
screwed up." Not PC software, of course; that part of
the market has more or less been conceded to
Microsoft. But the market for "enterprise software,"
meaning big programs bought by companies, remains
seriously fragmented. Cory says five companies --
Oracle, Baan, PeopleSoft, SAP and J.D. Edwards --
have become embroiled in a "knock-down, drag-out
fight" over the sector. Meanwhile, he says, there are "a
bazillion one-trick ponies with 200,000 lines of powerful
code; they are product lines masquerading as
companies." A lot of those, he expects, will become
acquisition bait. A case in point: IBM last week agreed
to pay $200 million to buy Software Artistry, which
makes help-desk programs.
Cory doesn't expect to see much consolidation in the
PC sector, but he expects considerable activity among
makers of mid-range and high-end servers. This includes
companies like Data General, Sequent Computer
Systems, Stratus Computer and Silicon Graphics.
Among possible acquirers, Cory lists IBM, "which has a
$100 billion market value, and no growth"; Compaq,
which has already taken steps to move into
high-powered systems with its acquisition of Tandem
Computers, and Hewlett-Packard, which Cory believes
needs to better focus its business and boost its growth
rate. Another possibility, Cory says, would be the
consolidation of high-end data storage companies, like
EMC, into the computer makers. In the networking
industry, Cory says, the old-line communications
equipment companies, like Lucent Technologies, Nortel,
Siemens, Alcatel Alsthom, L.M. Ericsson. (their is more but that's the best of it)patroller |
