The EMS Wave (Forbes.com)Riding The EMS Wave(Forbes.com)
Mary Crane, 06.07.06
New York - Technology biggies like Cisco Systems don’t make every component going into their products. Instead, they turn to an industry known as electronics manufacturing services, or EMS, to build their cables, circuit boards and even finished goods.
EMS remains a healthy business. Bear Stearns reckons that the industry will see $14 billion in new orders in 2006, up from $11 billion last year. For investors, now may be a good time to play the trend. Take St. Petersburg, Fla. Jabil Circuit (nyse: JBL - news - people ), which is now valued at less than its $8.7 billion in trailing-12-month revenues.
Jabil, whose biggest customers include Hewlett-Packard (nyse: HPQ - news - people ) and International Business Machines (nyse: IBM - news - people ), has its hand in several industries tagged by tech researchers at International Data Corporation as rapidly-growing when it comes to EMS: automotive, consumer electronics and medical. Thanks in part to such diversification, Bear Stearns analyst Kevin Kessel says Jabil will win $2 billion in new business this year.
Early last month, the U.S. Securities and Exchange Commission launched an investigation into possible stock options backdating from 1995 to 2002 at Jabil and a handful of other companies. Despite Jabil’s denials of foul play, the news has weighed on the stock.
For his part, Kessel suggests the matter could be a near-term overhang for the company until it is resolved, but he still likes its outlook for the longer haul. The stock sells for 19 times its consensus earnings-per-share forecast for the next 12 months.
Another of Kessel’s favorites: Singapore’s Flextronics International (nasdaq: FLEX - news - people ). "A turnaround story," he says. In May, Flextronics finished the acquisition of Nortel's manufacturing operations in Calgary, Alberta, the last of Flextronics’ acquisition of Nortel sites in Canada, and one that Kessel said could add $800 million in annual revenues. Integrating those operations has put near-term pressure on Flextronics, but most of the difficult integration of these operations is now behind the company, said Kessel.
If you believe the turnaround story, Flextronics looks cheap. Down 75% from a ten-year high, the stock goes for 14 times next-12-month earnings per share. That multiple is more than modest relative to the Thomson IBES analyst consensus for long-term earnings growth, now at 19% (annualized).
Two smaller picks: Benchmark Electronics (nyse: BHE - news - people ) and TTM Technologies (nasdaq: TTMI - news - people ). The former is favored by Standard & Poor’s analyst Richard Stice, who likes the Angleton, Texas, company’s ability to hold down costs. Benchmark sells for 17 times latest 12-month earnings. TTM Technologies, a small-capitalization printed circuit-board fabricator, made it onto Kessel's buy list because of its strong business model and balance sheet, which he said could facilitate accretive acquisitions.
A few things to be wary of here: Competition is intense—Asian companies like HTC, Nam Tai Electronics (nyse: NTE - news - people ) and Hon Hai Precision Industry (otherwise known as Foxconn Technology) continue to squeeze already-narrow margins, and business is increasingly vulnerable to changing consumer trends.
EMS Wave-Makers
Company
Price
Change From
52-Week High
2006 Estimated P/E
EPS Growth*
Market Value
($M)
Benchmark Electronics (nyse: BHE - news - people )
$23.29
-19%
15
17%
$1,497
Flextronics International (nasdaq: FLEX - news - people )
11.13
-23
14
19
6,439
Jabil Circuit (nyse: JBL - news - people )
35.65
-18
21
24
7,468
Sanmina-SCI (nasdaq: SANM - news - people )
4.76
-21
15
15
2,536
TTM Technologies (nasdaq: TTMI - news - people )
13.92
-20
15
18
581
Prices as of June 6.
P/E: Price-to-earnings ratio.
EPS: Earnings per share.
*Annualized; projected over the next three to five years.
Sources: FT Interactive Data, Reuters Fundamentals and Thomson IBES via FactSet Research Systems
ATQ is the only public company in the EMS sector that I can find that does not trade on a US market. There are at least 30 public companies that trade on US markets, none which have the rate of sales growth of ATQ. Does that represent an opportunity or a problem?