Contract Manufacturing Sector Set to Outgrow Nasdaq (FLEX, HPQ, MMI, RIMM, SNE, BHE, JBL, CLS, SANM)

With most of the significant electronic manufacturing services (EMS) players reporting revenue and earnings gains in the most recent quarter, the sector appears ready to accelerate with increased consumer and enterprise demand over the next few years. Given worldwide GDP growth in 2001, the EMS sector, which has enlarged its total value proposition significantly and developed highly flexible operating models in the recent years, is poised to outperform the Nasdaq, according to Paul McWilliams, editor of Next Inning Technology Research.

According to research firm IDC, the EMS industry will grow from worldwide revenue of $233 billion in 2009 to $400 billion by the end of 2014, a 65% growth rate. Even more importantly, McWilliams (whose model portfolio has returned over 365% since 2002) projects that non-GAAP operating profit margin for the companies in his EMS universe grew from 2.3% in 2009 to 3.4% in 2010. Based on aggregate revenue of $400 billion in 2014, the operating profit margin for the sector will grow to more than 4%. If McWilliams is correct, this suggests aggregate operating profits for the EMS sector will grow roughly 200% during the five year period.

In a recent 19-page report on the EMS industry, McWilliams details how sector leaders are set to capitalize on increasing demand and more efficient operations in 2011 to drive performance gains over the broad indexes. Accelerating demand for a broad range of electronic products including smartphones, tablets, PCs, servers, and telecommunications equipment, and eventually increased demand from rebuilding efforts in Japan, should provide solid traction for growth for several EMS market leaders.

• Flextronics International (FLEX), the second largest EMS company in the world and the largest publicly traded in the United States, capitalized on China’s recent effort to incentivize development of industry in non-costal regions, and has opened a new plant in central China that should provide world-class cost efficiencies even given recent advances in worker pay. The company has a large array of customers representing the leading providers of electronic devices and equipment worldwide, including Acer, [Dell], Hewlett-Packard (HPQ), Huawei, Lenovo, Motorola Mobility (MMI), Research in Motion (RIMM), and Sony (SNE).
• Benchmark Electronics (BHE) has expanded its presence in the industrial, telecom, and test and instrumentation sectors of EMS over the past two years, and has begun to rebuild its position in computing. The company recently gained FDA approval to manufacture Class III medical equipment in its Thailand facility, enabling it to grow its high-margin medical business. During the fourth quarter of 2010, Benchmark booked 22 new programs with annual revenue potential of $115 million that will ramp production during 2011.
• Jabil Circuit (JBL) is a consistent performer and has aligned its business model to best take advantage the continuing shift by Original Equipment Manufacturers (OEMs) to outsource manufacturing, assembly, shipping, and other services to EMS companies, as well as directly addressing the growing demand for electronic equipment in emerging economies with expanding global consumer clout.

The State of Technology report for EMS, which includes extensive analysis of Flextronics, Benchmark, Jabil, Celestica (CLS), and Sanmina-SCI (SANM), is one in a series written by Paul McWilliams each quarter ahead of earnings season offering specific guidance on which stocks he thinks investors should own and which should be avoided. These reports are available free, with no strings attached, to Next Inning trial members.

Tags: BHE, CLS, FLEX, HPQ, JBL, MMI, RIMM, SANM, SNE