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Rising inventories weigh on technology stocks
Thursday June 17, 5:41 pm ET
By Duncan Martell

http://biz.yahoo.com/rc/040617/tech_inventories_1.html

SAN FRANCISCO, June 17 (Reuters) - Concerns about rising inventories weighed on technology stocks on Thursday, hitting contract electronics manufacturers hard and stoking fears of slowing technology demand.

On Wednesday, Jabil Circuit Inc. (NYSE:JBL - News) rattled investors when it lowered its financial outlook, citing purchasing delays by four customers and a need to pare down inventories across the industry. Jabil's shares fell nearly 13 percent, while shares in Cisco Systems Inc. (NasdaqNM:CSCO - News), a customer of Jabil, fell 2 percent.

Technology investors watch inventory numbers closely for signs of slowing demand. In the big technology collapse of 2000-2001, inventories were the first sign of trouble.

Specifically, Jabil saw a modest increase in inventories at its networking, telecommunications and computing customers, said analyst Chris Whitmore at Deutsche Bank Securities, noting that inventories have been rising for months.

The average amount of time inventories were held by electronics manufacturing services (EMS) companies, such as Jabil, Celestica Inc. (Toronto:CLS.TO - News), Flextronics International Ltd. (NasdaqNM:FLEX - News) and Sanmina-SCI Corp. (NasdaqNM:SANM - News) rose by 4 days to 44 days in the first three months of this year, according to Whitmore.

"It's a classic component overbuild," said Fred Hickey, editor of the influential High-Tech Strategy newsletter. He said that demand slowed in May after the economic stimulation of last year's tax rebates, a boom in home refinancings and deficit spending ran out.

"Throughout the food chain, whether EMS (companies) or Cisco or Dell (Inc. (NasdaqNM:DELL - News)) or anywhere you had a build-up of inventories. And now the worst of all worlds: demand slows," he added.

Shares of Jabil tumbled $3.65, or nearly 13 percent, to close at $24.49 on the New York Stock Exchange. Shares of Flextronics, the largest EMS company, fell 6.5 percent, Celestica 5 percent,

'FIRST CLEAR SIGN'

"This is the first clear sign that some customers have started to cut orders," Whitmore said. "Lucent, Ericsson and Cisco all grew inventories significantly in the most recent quarter."

Telecommunications equipment maker Lucent Technologies Inc. (NYSE:LU - News), cell phone maker Ericsson (NasdaqNM:ERICY - News) and Cisco, the largest maker of gear that directs Internet traffic, are now just coming out of long slump following the three-year downturn in technology.

Concern about rising inventories weighed on Cisco shares in May, even though it had also then offered a strong outlook for its current quarter. Although Cisco said then it was building inventory for an expected increase in demand, investors hadn't forgotten when Cisco was forced in 2001 to write off $2.3 billion in inventory as the tech bubble burst.

Still, some analysts said the inventory build wouldn't necessarily ripple through the entire industry and hit individual companies.

"It's summertime," said Frank Dzubeck, a strategy consultant to the telecom industry and president of Communications Networks Architects. "Inventories build up now and then get flushed in the fall and winter."

"We're not seeing or have not seen, at least in this quarter, any type of inventory correction from our customers," said Solectron Chief Financial Officer Kiran Patel on a conference call on Thursday to discuss its quarterly results.

Shares of Cisco fell 52 cents to close at $23.36 on Nasdaq. Its main rival, router maker Juniper Networks (NasdaqNM:JNPR - News) fell 2.1 percent, while shares of Lucent slipped 1.7 percent.

Also hit hard by the Jabil news were Altera Corp. (NasdaqNM:ALTR - News), Xilinx Inc. (NasdaqNM:XLNX - News) and PMC-Sierra Inc. (NasdaqNM:PMCS - News), said brokerage Prudential Equity Group. (Additional reporting by Ben Klayman in Chicago)