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Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: Thomas Sterner who wrote (7646)	4/15/1998 12:28:00 AM
From: AlienTech	Respond to of 120523

Stock of the Day (Archive) Apr 14, 1998 With the tech sector struggling lately and a number of high-profile companies from Intel to Motorola warning about a slowdown, it really stands out when a company excels as Sanmina (Nasdaq:SANM - news) did in the latest quarter. After the close on Monday, the contract manufacturer of electronic components reported better-than-expected earnings and jumped 3 points in after hours trading. Sanmina posted a 58% gain in net income on a 29% increase in revenues. Fully-diluted earnings per share were up to $0.71, four cents above the consensus estimate and up from $0.47 a year ago. The company reported favorably on its integration of recent mergers, and as evidence showed an impressive increase in operating margins to 15.4% from 13.3%. So how is it that a manufacturer of printed circuit boards can be doing so well at the same time Wall Street reverberates with warnings of a PC industry slowdown? For starters, Sanmina does no PC business whatsoever. Its customers are primarily communications industry OEMs (original equipment manufacturers) such as telecom equipment and computer networking companies. Cisco Systems, 3Com, Motorola, Lucent, and Tellabs are the kind of names appearing on their customer list. And what about Asia, everybody knows the slowdown there is killing the tech sector, right? Sanmina only has about 5% of its revenue at risk due to the Asian crisis, so it is the least exposed of all the major contract manufacturers. That doesn't mean it won't be effected, but the impact is much less relative to its peers and the tech sector overall. Last October when the Asian crisis sent tech stocks into a tailspin, Sanmina was clobbered with the rest of them. The stock tumbled from $90.75 to as low as $50 around the turn of the year. It has since recovered to the low $70s. Analysts on average expect the company to grow at a 30% rate over the next five years. The stock is trading at about 25 times '98 earnings estimates, a discount to the expected growth rate, and estimates are bound to be hiked after Monday's positive surprise. It's no wonder that nearly every analyst covering Sanmina has a strong buy rating on the stock. Sanmina, Jabil Circuit (Nasdaq:JBIL - news) and Solectron (Nasdaq:SLR - news) are among several companies at the forefront of a broad outsourcing trend that is sweeping the electronics industry. Many young tech firms simply develop technologies and hire someone else to do the manufacturing. Even many well-established companies are selling their factories and embracing the idea of hiring specialists like Sanmina to produce certain components, or in some cases entire products. The merits of outsourcing production are fairly obvious - specialized contractors can do it cheaper, faster, in higher volume, and often with higher quality. It lets high-tech companies concentrate on design, marketing & distribution with an eye toward getting new products to market quickly and having the flexibility to respond to market changes more rapidly. The short product cycles of the high-tech world mean individual companies would be left in the dust unless they continually invested huge sums into manufacturing processes. Sanmina has made the capital investment and can spread the cost over all its accounts, so even the big established companies that already have factories find it is more efficient to contract out. And with production capacity throughout the U.S. and in Europe, outsourcing to Sanmina lowers distribution costs for companies that otherwise might have to build products in a single plant and ship them around the globe. The compelling argument for outsourcing has led to staggering growth for the industry of high-tech contract manufacturing. The industry is expected to grow at a 20% to 25% rate for the next few years, and analysts see Sanmina adding to that simply by gaining additional business with its existing client base and continuing to increase operating efficiencies through scale. So while contract manufacturing isn't exactly a sexy business, it is in front of a powerful evolution in the technology sector that is supporting strong--and notably consistent--growth.