2009 EMS outlook: Wall Street electronics manufacturing services analysis

As investment bank Needham & Co., LLC looks to 2009, the bank believes economic disruption should magnify difference between strong and weak electronics manufacturing services (EMS) companies. The bank's universe of EMS companies it follows include: Benchmark Electronics, Flextronics, Jabil Circuit, Plexus and Sanmina-SCI.

In this report looking at what's in store for 2009, Needham & Co. outlines a few key themes influencing EMS players in its universe:

• inventories
• capacity
• visibility and end-market exposure
• new outsourcing opportunities
• available cash
• raw materials
• viability

The investment bank believes most EMS companies it covers will be hard pressed to exhibit revenue growth in 2009. However, the bank comments to industry investors of the basic EMS value proposition: manufacturing and supply-chain prowess. Meanwhile, research firm IDC still expects EMS industry revenue growth in 2009, and believes larger opportunities remain longer-term.

As Needham & Co., attempts to layout its outlook for 2009 in the following pages, discussions the bank has had in industry suggest that visibility remains incredibly challenging and the first half of 2009 could exhibit lower revenues year / year near the double-digit range. Smaller pockets of support that may provide some buffer are likely to be within non-traditional EMS industry segments such as medical and industrial electronics or, from outsourced programs entirely new to the industry.

High-end computing; consumer electronics and infrastructure / networking appear positioned to remain particularly challenging. Most discussions in industry indicate that companies the bank follows have earmarked C2Q09 as the potential turning point with the back half of the year likely to be quite back-end weighted.

In consideration of the current environment, IDC recently forecasted the base case for 2009 global IT spending growth to be roughly 2.6% (down from ~4% to 5% growth in 2008), with the downside projected to be flattish.

While the investment bank does not believe all EMS companies in its universe of coverage will exhibit revenue growth in 2009, the bank does believe it is important for investors to remember the basis of the EMS value proposition: manufacturing and supply-chain prowess.

IDC EMS WW Revenue Projection (Billions $USD)

With this in mind, below are expansions for each of the key themes noted previously, above.

Inventories

Regarding the EMS companies covered in this report, nearly all exited C3Q08 with higher inventory levels as a percentage of sales than the prior year but, lower than in 2006. Potential write-downs are a legitimate concern for the EMS industry; so, companies with a high concentration of established and diversified OEM customers (such as Plexus) could potentially run into fewer issues. In general, Needham & Co. expects the EMS industry to work with OEM customers to drive levels lower - which will take time.

Interestingly enough, some EMS programs with OEM customers (which fall under categories such as industrial) require high levels of inventories - at the request of customers. If the dynamic is maintained at the request of the OEM, such business would need to command margin premiums to compensate for the risk. Overall, the investment bank believes the metric requires further monitoring even though OEMs are accountable (technically), in most cases.

    

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