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

To: Robert G. Harrell who wrote (1203)	2/4/1998 2:56:00 PM
From: kolo55	Read Replies (4) \| Respond to of 2542

Sector looks fairly strong again today. It is apparent that the institutional investors that abandoned Jabil last fall are flooding back into the stock the last 3-4 days; the volume there has been huge and the stock has bust through the 100 day moving average. I'm guessing Jabil leads the whole sector up. On your question of IECE; again, I haven't had a chance to investigate the stock in detail lately. These mostly domestic ECM companies are often dependent on several key customer contracts in the range of $30-50M, and the loss of one contract can really hurt them. This hasn't happened to IECE yet, but the pits that ACTM, PLXS, K*TEC(KNT), etc. have fallen into should warn you. Still, the domestic ECM stocks have gotten much cheaper in relation to the bigger global players like SLR (up 50% since before early December earnings release), JBIL, DIIG, and FLEXF (all up 40-50% off their lows last December), and so at some point you might ask "How cheap is cheap enough?" And the answer to that is how much you are personally willing to pay up for higher growth rates and long term stability that the bigger players have and will see. Since I am a GARP investor (Growth at Reasonable Price), I found my best buys in the faster growers. But I also bought some sector stocks based on value issues (like % of book, and PE) which put me into the Chinese plays (DSWLF and NTAIF), and also into two beat-up domestics, ACTM and PLXS. I was way too early on ACTM, and got my head lopped off. This has reinforced my natural inclination to stick to the global players. But if you like to buy cheap out of favor stocks on hopes of a turnaround, the domestic ECMs sure fit that bill. But the long term growth is definitely going to be dominated by the global players. Last week, Micheal Marks of Flextronics said at the Montgomery conference, that he considers the global business the most attractive growth arena, versus domestic or international business. Customers now come to them and ask for manufacturing for a global market, and ask for a recommendation proposal where Flextronics would manufacture to best supply that market. So for 3-4 customers now, Flextronics builds essentially the same base product on three continents, customizing to meet the needs of the local market. Marks believes these "global product markets" will be a significant business opportunity for his company. To paraphrase him, "we went global, because we had to, in order to meet the needs of our customers". Of course, buying the best company isn't always the best investment. One still must answer the question "At what Price?". Otherwise, I would own only SLR, JBIL, and FLEXF. There is a reason they trade at high trailing PE ratios. I don't think we are into the takeover phase yet for the smaller publicly traded companies. The ELEX deal was the exception, not the rule. As long as the big players can do buy-outs of captive plants and private companies, or build-outs of plant capacities at better ROIs, the takeovers won't come. But in about 5 years, this will change, as the sector begins to consolidate as the outsourcing trend begins to slow down. We may begin to see some consolidations in about 3 years. This is all JMO. Paul