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Wednesday, July 15, 2009

If Intel does well, these stocks should, too

Intel's good earnings report and positive forecast for the second half of the year lit a fire under many tech stocks today.

It's a not a stretch to conclude that, if Intel is doing well, so will other companies in the semiconductor sector. But the benefits aren't limited to the semiconductor sector. There is another sector that might not immediately come to mind that I think will also see improved results.

Contract electronics manufacturing --

Intel has said that one reason their expectations for the rest of the year are looking better is that there seems to be solid demand from the consumer, especially in emerging markets and China. If Intel is selling more microprocessors, someone must be using them in finished goods, especially consumer electronics products. These days, much of the assembly of electronic products is outsourced. It would seem that those companies in the contract electronics manufacturing sector will see more business coming their way.

There are a number of companies in this sector but two of the biggest names are Flextronics (FLEX) and Jabil Circuit (JBL). We'll take a quick look at both.

Flextronics --

The company has factories on four continents and is all over the map with regard to services offered and customers served. According to Hoover's, Flextronics provides manufacturing services to the world's leading electronics companies, including Cisco Systems, Eastman Kodak, Ericsson, Hewlett-Packard, Microsoft, Research In Motion, and Sony-Ericsson. The company's services range from design engineering, through manufacturing and assembly, to distribution and warehousing. It manufactures and assembles printed circuit boards, electromechanical components, subsystems, and complete systems for a wide range of makers of networking and telecommunications equipment, computers, consumer electronics, and medical instrumentation.

The company had $30B in annual revenue but still managed to turn in a loss during this recession. The most recent quarter, however, Flextronics got a lot closer to profitability. It seems that expectations among investors are improving, as the chart below shows.

Flextronics stock chart
Jabil Circuit --

Again according to Hoover's, Jabil is one of the leading providers of electronics manufacturing services (EMS) in the world. Parts made by Jabil on a contract basis are used in communications products, computers and computer peripherals, and automobiles. Services range from product design and component procurement to order fulfillment and supply chain management. The company is rapidly expanding into Asian and Eastern European markets, through acquisitions and new plants. Top customers include Cisco Systems (16% of sales), Hewlett-Packard (11%), Nokia, and Philips.

Jabil is smaller than Flextronics but still rolled up over $12B in annual revenue. Like Flextronics, Jabil has also shown a loss over the last year but significant improvement in the most recent quarter.

Jabil Circuit stock chart
Conclusion --

Looking at these charts, it appears that some investors are already placing their bets on these two companies. If you accept that Intel's strength is a leading indicator for a large swath of tech companies, it is reasonable to assume that the strength in component makers will trickle down to those companies that put all the components together. That puts Flextronics and Jabil Circuit squarely in line to benefit from the nascent recovery in the tech sector.

Disclosure: no positions

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