2HRS2GO: Circuit board makers see burgeoning business

Imagine: contract electronics manufacturers trading at almost Internet-like multiples.

The market recently decided that circuit board makers will be the next hot market, driving the likes of Solectron Corp. (NYSE: SLR), Jabil Circuit Inc. (NYSE: JBL), and Sanmina Corp. (Nasdaq: SANM) to respective multiples of 53, 48, 39 times estimated 1999 earnings. And this week may give investors justification for their confidence.

Circuit board makers: Ahead of themselves?

Solectron set the tone yesterday when executives predicted fiscal 2000 results would come in ahead of Wall Street expectations, thanks to increased business from current customers and strong growth in new accounts. Up next is Jabil, scheduled this afternoon to report third quarter results.

First Call's survey of 26 analysts predicts earnings of 29 cents a share for Jabil, but as long as the company meets the number, there's nothing to worry about. As with Solectron, the real curiosity about Jabil centers around the future. And as with Solectron, investors should expect it to be bright, said Ann Schwetje, analyst with CS First Boston.

"The company doesn't seem to be giving off any kind of body language that would indicate any discomfort with the business," says Schwetje, who expects Jabil to report revenues of $579 million, which would represent a 7 percent sequential increase. "Their growth should be all organic."

Burgeoning business from the telecom equipment makers should power the top circuit board makers higher, Schwetje says. Within two years, analysts expect that segment to generate $10 billion in outsourced manufacturing, and most of it will go to the top rank of contract manufacturers, to companies like Solectron and Jabil.

That it's taken this long for the Lucents, Ericssons and Nortels to start a strong move toward outsourcing shows how their industry remains gripped by the vestiges of the traditionally slow telephone industry. But they have woken up, and the circuit board guys will be one of the big beneficiaries. "Telecom equipment makers now have had plenty of samples that have shown them the profitability aspects of outsourcing with contract manufacturers," Schwetje says.

In a sense, the manufacturing outsource industry can thank John Chambers for boosting their prospects, because it was encroaching competition from network equipment houses like Cisco Systems Inc. (Nasdaq: CSCO) that woke up the telecom hardware makers. "Now they all want to be global, and what the contract manufacturers provide is an easy switch into different regions," Schwetje says.

The telecom burst comes on top of increased business that the top circuit board makers already expect from their traditional OEM customers. Not only are PC companies and others sending out more of their manufacturing, but they're doing it in larger batches. "The OEMs want to deal with fewer contract manufacturers," Schwetje says.

Which means the bigger dogs -- SCI Systems Inc., Sanmina, Jabil, Solectron, at the very top -- will get even bigger; Solectron, for instance, expects to see annual revenues of $20 billion by 2001 -- almost a fourfold increase from fiscal 1998.

Despite the extremely rosy outlook, some analysts fear these stocks are getting ahead of themselves. But the market has to put its money somewhere, and it might as well be into companies that make actual products and even better -- actual profits.

Other issues:

Youbet.com Inc.

(Nasdaq: UBET) Recent Triple Crown excitement notwithstanding, for further evidence that horse racing's popularity is waning, look no further.

Youbet -- basically an OTB for the Internet -- went from being an over-the-counter stock to a Nasdaq regular today. But with a drop of 19 percent coming out of the gate (Yes!! I have dreamed the lazy writer's impossible dream: a cliche that, for once, actually applies), investors (bettors?) clearly have no use for this one.

Perhaps the market is dismayed by the secondary offering of 3.5 million shares at $14 apiece, but that might have been overcome if Youbet actually had a history. But a company that just started generating revenue in the fourth quarter of 1998 is too new to be going public as a Nasdaq contender -- heck, it's not even old enough for second stage venture capital, roughly the investment community's equivalent of a claiming race.

Earthlink Network Inc.

(Nasdaq: ELNK) I don't know if every ISP works this way, but I've already had at least two ISPs that let me download my e-mail from any computer (you just change the server, account name and password settings in your e-mail program). That, along with the proliferation of free e-mail services such as Juno, Hotmail, and Usa.net, makes me wonder why Earthlink's universal e-mail is as revolutionary as the company claims in today's announcement.

Oracle Corp.

(Nasdaq: ORCL), Micron Electronics Inc. (Nasdaq: MUEI) Earnings are due out after market close today for these technology heavyweights. First Call predicts per-share profits of 32 cents and 6 cents, respectively.

The rest of the technology market had generated positive gains by mid-afternoon. With two hours left in regular trading, the Nasdaq Composite Index was up 22.22 to 2420.53, the S&P 500 had gained 12.38 to 1306.38, and the Dow Jones Industrial Average had risen 80.13 to 10643.43. 22GO>