2HRS2GO: Circuit board makers see burgeoning business

4 min read

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:

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  • Oracle Corp.
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