Electronics companies see signs of recovery
Reuters
February 9, 2004, 9:43 AM PT
Makers of electronic gear for big-name companies like Dell and Hewlett-Packard are confirming what many investors have already concluded: Their sector is bouncing back.
The companies, which make personal computers, servers, cell phones, handheld computers and other electronics gear, say they are seeing stronger demand in 2004, helped by an improving economy and a trend to outsource production of those items.
Shares in some of the biggest companies have risen 20 percent or more so far this year, and some analysts already are questioning whether the trend can continue.
"What we see today is a lot more positive signs from our customers," Jure Sola, chief executive of Sanmina-SCI, said at an investors conference in San Francisco this week. "They definitely have a more optimistic forecast than they did a year ago...2004 is going to be a better year."
The companies, known as contract electronics manufacturers, were among the hardest hit in the technology industry during its three-year downturn.
They slashed payrolls by the thousands, cut capacity and restructured to serve new markets in response to the tech recession. Margins fell as prices dropped faster than the companies could cut costs by shuttering assembly lines.
Flextronics International, the largest contract electronics maker, late last month reported that its quarterly revenue passed $4 billion for the first time ever, and posted a net profit, which compares with a year-earlier loss.
The company also raised its sales and earnings projections for its current quarter and the remainder of the year, saying current estimates were about 10 percent too low.
New markets
Flextronics, like rivals Sanmina-SCI, Solectron and others, has moved to target military, medical and industrial markets, in addition to more traditional markets such as computers and telecommunications.
"Demand is finally getting back into balance with supply, and pricing is starting to go up," Thomas Smach, senior vice president, finance, for Flextronics, said at the Thomas Weisel Partners Tech2004 Conference. "The next cycle is just beginning, and demand is accelerating, and it's easy to forecast in this environment because you need more."
Other executives agreed on the recovering market for EMS companies.
"We're pretty excited about what we're seeing," Perry Hayes, Solectron's treasurer, said at the conference. "I think the coming growth comes from rising (gross domestic product) and the double-digit expectation for continued outsourcing in the EMS sector."
With rising demand come rising component prices. But now, unlike during the downturn, EMS companies are having some success at passing on rising component costs to their customers.
"Pricing in components, if anything, is increasing," Sola said, adding that with rising prices come difficulties getting components that EMS companies need. "I expect component shortages; I expect prices to come up moderately. But customers are giving us better visibility."
As demand is improving, factories are filling up, helping to improve profitability in a business that already has slim margins.
Deutsche Bank analyst Chris Whitmore, in a note to clients this week, said the six EMS companies he covers have an average gross margin of 6 percent--about half what it was in the 1990s and 2000. And that comes after $5 billion in restructuring charges the companies took.
"Capacity utilization is moving up in some areas," Flextronics' Smach said, noting that in low-cost regions like Asia and Eastern Europe factories are full, whereas in high-cost regions like the United States and Western Europe capacity utilization rates are not as high.
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