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SCI's troubles compound PC market jitters

The contract manufacturer's stock falls as much as 30 percent after the company warns of weaker revenues from building PCs and consumer electronics.

Contract manufacturer SCI Systems watched its stock fall as much as 30 percent today after the company warned of weaker revenues from building PCs and consumer electronics.

SCI cited "seasonal weakness in demand" and component shortages as the reasons underlying its warning that revenue would drop from an expected $2.3 billion to $2 billion and earnings per share from 38 cents to 34 cents for its first fiscal quarter.

SCI's shares closed at $55.94 yesterday but plunged as low as $39.19 this morning before recovering somewhat at market close. At the end of regular trading, the stock was down $10.13, or 18 percent, to $45.81.

The company, which is based in Huntsville, Ala., and has factories all over the world, builds PCs chiefly for Hewlett-Packard and secondarily for Compaq Computer and Dell Computer.

The revenue warning, combined with analyst downgrades today of chipmakers Advanced Micro Devices and Intel, heightened jitters in the PC and chip industries. By market close, Gateway was down 7 percent, Compaq dropped 5 percent, HP sank 5 percent and Dell dipped 3 percent.

But it's anyone's guess whether the difficulties in the sector are related to manufacturing problems or weak demand. Banc of America Securities analyst Richard Whittington, who downgraded Intel today from "strong buy" to "market perform," pointed to problems with Intel's manufacturing process and said the company is having trouble supplying enough processors for this and next quarter.

"Intel watchers have been treated to one miscue after another over the past year," Whittington said. "In spite of forecasts to sharply increase supply of microprocessors in the second half, reports continue that Intel is falling short of the mark, not just for the third quarter but for the soon-arriving fourth quarter as well."

Whittington praised AMD's solid performance, but Prudential Securities' Hans Mosesmann downgraded AMD today from "strong buy" to "accumulate." Mosesmann said AMD is amassing unsold high-end Athlon chips but added, "We do not believe there is a demand problem in the market and view the PC market as solid."

Last week was equally volatile. Ashok Kumar, an influential analyst at U.S. Bancorp Piper Jaffray, downgraded Intel, saying PC growth would be lower than expected for the third quarter. However, PC makers and other analysts disputed the prediction.

Meanwhile, SCI insists its troubles are short term. It left its overall projections for the fiscal year unchanged at $10.5 billion in revenues and $1.70 to $1.74 in earnings per share.

SCI, once the largest contract manufacturer in the world, has ceded the top spot to Solectron. But SCI is still among the top five along with Flextronics International, Jabil Circuit and Celestica, according to analysts who follow the electronics manufacturing industry. These manufacturers are getting increasingly sophisticated as they take over manufacturing, component purchasing and even some design duties for name-brand companies such as HP or Nortel Networks.

By market close today, Flextronics was unchanged, Solectron was down 1 percent, Celestica sank 4 percent and Jabil Circuit dropped 4 percent.

Merrill Lynch analyst Jerry Labowitz said the other manufacturers' stocks "are down in sympathy" but added that he believes SCI's troubles don't mean problems for other contract manufacturers. "This is purely company specific in our view."

Solectron on Monday reported earnings of $171 million on revenues of $4.7 billion in its most recent quarter. The biggest customer segment was networking, accounting for 28 percent of revenues, with telecommunications coming in second with 20 percent, Solectron said.

SCI is following suit, working to diversify its customer base by adding more communications customers. "SCI's end-use market mix is becoming more communications driven," SCI chief executive Gene Sapp said in a statement.

One part of SCI's troubles comes from weak revenues in building full PCs, Labowitz said. PC building accounts for about 20 percent of the company's revenues. But the larger part of SCI's current problems stem from set-top boxes.

SCI's largest set-top box partner is Nokia, Labowitz said. Hurdles in its set-top box business right now include a design change, the early stages of manufacturing of new products, and component shortages, Labowitz said.

Set-top box maker Scientific-Atlanta's stock opened lower because of the SCI warning, ABN-AMRO analyst Kenneth Leon said. However, Scientific-Atlanta makes all its own set-top boxes, and the stock recovered most of its losses in midday trading.