Contract manufacturers signal high-tech recovery

SAN FRANCISCO: While electronics manufacturers are holding back from declaring a recovery, some of the makers of circuit boards, computer components and cell phones are increasingly optimistic business will improve.

Since the industry has already shed jobs and excess facilities, even a modest gain in technology spending next year could drive earnings sharply higher, analysts say.

Flextronics International Ltd. and Solectron Corp., two of the biggest contract electronics makers, this week signaled that demand appears to be on the mend, providing hope for a gradual turnaround after a long slump, analysts said.

<>That supports what analysts said they are hearing from tech companies, who hire contract manufacturers to build products, including network gear, PCs and consumer electronics.

“We’re hearing that from multiple sources from different parts of the supply chain,” Wells Fargo Securities analyst Jim Savage said. “It seems to be fairly broad at this point.”

Savage noted that some of the contract manufacturers’ largest customers, such as Cisco Systems Inc. and Nortel Networks Corp., have recently indicated increased business.

Network gear maker Cisco earlier this month said its order backlog rose 14 percent from a year ago and telecom equipment maker Nortel has been tapped by French mobile phone group Orange SA to supply its third-generation network.

“Printed circuit board companies believe they are seeing real growth in their market segments,” Savage added. “And the chip packagers and foundries have been talking about higher utilization rates.”

DEMAND SEEN IMPROVING

Flextronics Chief Executive Michael Marks on Thursday echoed previous optimistic statements. “Our business is actually improving and we are feeling very positive about it,” he said.

Marks added that Flextronics’ cell-phone business was “clearly turning up” for the company, which also makes the Xbox game console for Microsoft Corp. .

And in a reassuring note to investors, he said that the company expected to pay less than $10 million on appeal of a shocking California jury verdict last week that ordered the company to pay $934 million.

Rival Solectron on Thursday forecast revenue growth of 10 percent to 15 percent in its current fiscal year. “We secured several important customer wins, and the end-markets we serve are recovering,” said Solectron Chief Executive Mike Cannon.

Timothy Main, the chief executive of Jabil Circuit Inc., last week said the St. Petersburg, Florida-based contract manufacturer was “looking forward to expanding and improving our business throughout fiscal 2004.”

Jabil Circuit, whose customers include Dell Inc. and rival Hewlett-Packard Co., said it anticipates full fiscal year 2004 revenue to increase about 20 percent.

CAUTION AMID OPTIMISM

“I’m certainly encouraged,” said Todd Coupland, an analyst with CIBC World Markets. “In the medium term, things are looking pretty good for the sector.”

However, analysts remain cautious after previous false starts for a high-tech recovery and are concerned contract manufacturers’ shares may be viewed as too expensive.

Valuation is also a concern.

Analyst Chris Whitmore of Deutsche Bank Securities issued a research note on Friday in which he reiterated a “hold” rating on Flextronics. He called the company the “best long-term investment vehicle” among contract manufacturers, but said that with its stock trading at 38 times forecast calendar year 2004 earnings, investors should wait for a more attractive price.

“Share prices will be over-priced if what we have seen over the course of the summer stalls,” Coupland said, referring to comments high-tech companies have made that have helped propel contract manufacturers’ shares higher.

Shares in Flextronics closed on Friday on the Nasdaq at $13.62, down 2 percent on the day and up 90.5 percent from a low this year of $7.15 in mid-February.

Solectron shares closed on the New York Stock Exchange at $5.98, up less than 1 percent on the day and up 113.6 percent from a low this year of $2.80 in mid-February.

Shares in Jabil closed on the New York Stock Exchange down 3.3 percent at $25.50. They are up 75.7 percent from a low this year in February of $14.51.

(C) Reuters