se o Nasdaq entrar em rallie mode no 4T vou estar de olho EMS
TSC Stocks Under $10
Picking Through EMS Plays
By TSC Investment Team
9/17/2004 11:16 AM EDT
http://www.thestreet.com/comment/stocks ... 83382.html
The indices are in the midst of another multiweek rally, but the catalysts for an upward move in stocks this time have been few. When you consider the weak numbers and talk of inventory problems in the software and storage sectors, the only plausible reason stocks are going up is that they went down too far.
However,
the low-dollar Electronic Manufacturing Services, or EMS, stocks -- particularly Sanmina (SANM:Nasdaq) , Celestica (CLS:NYSE) , Flextronics (FLEX:Nasdaq) and Solectron (SLR:NYSE) -- look compelling at current levels, despite only pulling back modestly since the recent rally.
Below, we run through each company and evaluate which stocks are cheap for a reason, and which are good to own as long-term call options on a pickup in technology spending and end-market demand for electronics. The jury is still out on which direction we are headed, but even moderate growth can support current price levels.
EMS companies manufacture electronic equipment and components for the major tech bellwethers like Dell (DELL:Nasdaq) , Hewlett-Packard (HPQ:NYSE) and Cisco (CSCO:Nasdaq) . In the past they have served as a barometer for the underlying health of the broad tech industry, outperforming when demand for tech hardware and components is strong and capacity is running full, and gasping for air when tech channels are packed with inventory or demand slumps.
Given the state of the EMS sector, it's a good time to take a serious look at some of its winners and losers. We don't see any of these companies returning to their prebubble valuations anytime soon for a host of reasons, including lower total production, shipments and selling prices that are pressuring earnings in the sector and the lower risk tolerance and reduced patience for technology stocks in the current market.
Class of the Field
First up is Sanmina, a stock we hold in the Stocks Under $10 model portfolio. This stock traded as high as $60 a share, and near 100 times earnings in tech's heyday. Now this EMS play can be had for $7.19, or just 20 times next year's earnings. Sanmina's largest customers include Dell, Nokia (NOK:NYSE ADR) and IBM (IBM:NYSE) . Both Dell and IBM raised guidance last quarter, which offers some cushion to Sanmina reaching its top-line target. The company generates about half of its sales from the computer hardware space and, along with the rest of the group, has seen production levels fall and competition eat away at margins.
That's why it's comforting that Sanmina's strength isn't coming from the computer industry alone. Twenty-five percent of Sanmina's sales last year came from communications stocks, a group that we believe is poised to benefit from a spending surge to roll out fiber-to-the-premises, or FTTP, en masse in the next two years. Nokia recently boosted its forecast, saying the handset market is tracking well.
But management is taking the right steps to increase profitability by closing down high-cost North American facilities in favor of cheap overseas plants. We believe Sanmina's customers, made up of the handful of technology plays that are performing well in this environment, offer the best upside of any of the EMS companies, and we wouldn't mind holding a small position in the stock through these selloffs.
Beware Steep Prices
Next is Celestica, whose shares closed at $12.25 Thursday after dropping 20% Wednesday following its Tuesday night warning that it would not meet expectations for the third quarter. Celestica had forecast that it would earn 14 cents a share on sales of $2.33 billion, but said it now expects to turn in a 9-cent profit on $2.1 billion. This is a significant miss and could suggest that the weakness came at the end of the quarter, a bad sign for the overall tech economy, though not much of a surprise if you listened to Hewlett-Packard or any of the other tech giants that lowered forecasts in recent months.
Celestica has a big footprint in the communications side of the EMS business, deriving 48% of its sales from industry leaders including Cisco, Avaya (AV:NYSE) and Lucent (LU:NYSE) . This gives Celestica access to the burgeoning voice-over-Internet protocol, or VoIP, market. But the pricing and margins may not be as high as expected in the VoIP arena, due to lackluster economic growth and slower migration from traditional landlines. Throw in the company's exposure to struggling networking company Sun Microsystems (SUNW:Nasdaq) , and we believe Celestica has more earnings downside than upside ahead.
When you put a 34 times price-to-earnings multiple on the stock (based on the 37-cent consensus earnings estimates for 2004), it is definitely in no-man's land, where the value guys will stay away and decelerating earnings growth won't bring in growth investors. We don't view the recent fall in price as a buying opportunity, so we would avoid this stock for now.
Inflexible Sentiment
Flextronics is a stock that investors either love or hate, depending on where they stand in the debate on whether the consumer is leveraged out or can continue to buy gadgets like handsets and inkjet printers. These machines account for about half of Flextronics' sales, so you can see how consumer sentiment would weigh on its outlook.
Flextronics has had fairly stable revenue growth over the past few years, due in part to the strength in the consumer electronics markets. For the fiscal year ended March 2004, revenue grew 8.6% year over year and was up 20% from 2001. Flextronics' steady top-line growth hasn't come cheap, however. Management has been very acquisitive over the last few years. Among the biggest deals was its purchase of Nortel's (NT:NYSE) manufacturing operations, including the optical, wireless and enterprise manufacturing divisions. Most recently, the company sold $300 million of stock in a secondary offering designed to remove the slim cloud of doubt about its finances and refill the coffers. As investors, we would rather not see equity get diluted when owning a highly cyclical name like Flextronics.
The company earned 13 cents a share in the June quarter and, at $12.71, trades at about 19 times next year's estimates, which is not cheap by any means. But bulls will point out that on a price-to-book and enterprise value/EBITDA basis, the stock is trading at the low end of its historical range. And we believe it should.
Deselect Solectron
And finally, there's Solectron. This EMS play has perhaps the most ominous customer list out there: Hewlett-Packard, which is still struggling to integrate Compaq; and Cisco, which faces tight competition from Juniper (JNPR:Nasdaq) . Forty percent of Solectron's revenue came from communications-equipment makers last year, and another 9% from automotive and semiconductor customers, all of which are in cyclical downturns.
The stock is trading at $5.11, or almost 20 times expected fiscal 2005 earnings of 26 cents a share. This is expensive for a company with a troubled customer list, and we would not be surprised to see downward estimate revisions in the coming weeks, similar to the Celestica preannouncement two nights ago. Based on these factors, we are staying away from Celestica as well.
Research assistant Michael Comeau contributed to this article.
William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback and invites you to send your comments to william.gabrielski@thestreet.com.
Interested in more writings from William Gabrielski? Check out Stocks Under $10. For more information, click here.
David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier welcomes your feedback and invites you to send your comments to david.peltier@thestreet.com.
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Enviado: 30/10/2004 12:51Só me escapa se abrir em gap...
