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2HRS2GO: Analysts renew faith in Hadco

A 10-point jump for a manufacturing stock in a single day? Who would have figured?

Yet that's what electronics manufacturer Hadco (NYSE: HDC) has seen today, following an outburst of upbeat sentiment from investment banks. HDC shares gained as much as 26 percent this morning and remained up 18 percent in early afternoon.

At least three Wall Street analysts released positive comments on Hadco. Merrill Lynch's Jerry Labowitz, Donaldson, Lufkin & Jenrette's Mark Hassenberg and Robertson Stephens' J. Keith Dunne set HDC price targets of $88, $85 and $75 to $80, respectively.

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Hassenberg evidently sees Hadco as part of a larger trend, since he also raised price targets on two other leading contract manufacturers, SCI Systems (NYSE: SCI) and Flextronics (Nasdaq: FLEX). Although these companies traditionally have been pegged merely as makers of printed circuit boards, all are trying to reposition themselves as providers of "value-added" manufacturing, which includes other components and sometimes a bit of design service.

Merrill's Labowitz notes that Hadco recently said it would add 50,000 square feet to its Silicon Valley plant that specializes in value-added services. "We think the company should be valued as a hybrid between a pure PCB fabricator and an EMS provider," Labowitz writes.

Hadco recently added 20 new accounts in that broader value segment, including at least two and maybe three large telecom equipment firms, Labowitz says.

Communications hardware companies drive much of the contract electronics manufacturing growth these days as they farm out more and more pieces. But analysts generally believe the large players in the industry are in a position to get bigger.

"In addition to strong industry trends, we believe Hadco may also be taking share as industry consolidation continues," Robby Stephens' Dunne says.

Which could explain the growing strength of the Hadcos and SCIs, while companies such as The DII Group (Nasdaq: DIIG) are forced look for mergers. Flextronics agreed to buy DII in an all-stock deal expected to close next month.

Dunne believes Hadco's backlog has grown almost 50 percent sequentially. And high demand means high orders, higher margins and longer lead times; Dunne estimates Hadco's non top-20 accounts now generate lead times nearly twice as long as the industry average.

"With lead times lengthening, we believe well-managed companies like Hadco should be able to command better pricing, which should start to materialize in third quarter earnings," writes Dunne, who boosted his Hadco earnings estimates to $3.55 for the current fiscal year and $4.10 for the next, compared to $3.26 and $3.80 previously.

Until today, Hadco was trading at less than 20 times estimated fiscal 2000 earnings, which is relatively cheap in today's environment, particularly for a company expected to boost earnings per share about 75 percent. And even yesterday's price was only reached after a 57 percent climb over the last five months.

Obviously a lot of ground was made up today. If analysts are right, there's room for more.

Other issues:

  • Arrow Electronics
  • (NYSE: ARW) While we're talking about old-fashioned businesses that are suddenly drawing attention today, consider this distributor of parts for computers and electronics. Web marketplaces and Internet distribution may be growing rapidly, but there's still something to be said for the efficiency of centralized distribution, particularly in a time-sensitive industry such as electronics and PC manufacturing. And that's why Arrow sees another strong quarter ahead. 22GO>