EMS Companies Showing Strong Growth As Market Sees A Radical Increase In End-market Sales Figures According To Technology Analyst At UBS Investment Bank; Discover His 4 Highly-rated Stock Picks In An Exclusive Interview

Wall Street Transcript

67 WALL STREET, New York - August 1, 2011 - The Wall Street Transcript has just published its Electronic Components Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online. Topics covered: Growing Electronic Component Content - Secular, Seasonal and Cyclical Demand Trends - Supply Chain Disruptions Companies include: AT&T (T); Aruba Networks (ARUN); Ingram Micro (IM); ASML (ASML); AVX (AVX); Aeroflex (ARX); and many more. In the following brief excerpt from the Electronics Components Report, expert analysts discuss the outlook for the sector and for investors. Amitabh Passi is a Technology Analyst at UBS Investment Bank, where he covers the technology supply chain and NA wireless sectors. He joined UBS in 2005 as an Associate Analyst on the communication equipment team, and during his tenure has been part of a top-three ranking team in Institutional Investor's All-America Research Team survey. Prior to joining UBS, Mr. Passi held several technical and business development management positions at Nortel Networks. He holds an MBA from Columbia University. TWST: Please give us an overview of your coverage in the electronic component space. Mr. Passi: There are basically three or four different subsectors that I cover. One area is the passive component space. These would be connector companies. I cover a capacitor company, and I cover one company that makes printed circuit boards. I also cover a couple of the large EMS companies. These are the electronic manufacturing service providers, essentially companies that manufacture product for many of the large tech, and increasingly industrial, OEMs. And these companies would include Flextronics (FLEX) and Jabil (JBL). TWST: It seems like demand is everywhere for the component companies. Is that accurate? Mr. Passi: I think it is. What's interesting is this is an industry that has grown in line to maybe slightly above GDP in the 6% CAGR range - that's the long-term compounded annual growth rate - over the last 20 or 25 years. But to your point, yes I do think demand is everywhere. And what's hard to quantify and ascertain is it seems like we might be at an inflection point, where I feel you could potentially see growth rates, at least in the short to midterm, that could be faster than the long-term growth trajectory. The reason I say that is everybody is buying smartphones today. If I go back to content differential, low-end phones, as I said, would probably consume $0.50 to $1 in content. And we are now looking at mid- to high-end phones consuming $3, $4, $5. That's almost a three times, four times increase in the amount of content being consumed. We can see a similar situation with TVs. The old analog TVs, CRT TVs, didn't really consume a lot of connector content. But now you look at LCD TVs, and you have an array of content. Similarly, we talked about a lot of the end markets, whether it would be automotive, some of the new planes in Boeing and Airbus - they consume almost three times to four times as much content. I do think that demand is everywhere. As I said, historically this is an industry that's grown at 6% CAGR. Over the next 30 years, my guess is that probably it sustains the growth rate, but it almost seems shorter term we might be in a period where we could be seeing a bit of an acceleration in the growth trajectory. TWST: Looking at your universe, what are your top picks right now and why? Mr. Passi: One of my favorite names is TE Connectivity. They used to be called Tyco Electronics. It's the largest connector manufacturer, and it has roughly 20% share in the industry. This is a company that was spun out of the old Tyco. They went public mid-2007. So by the third, fourth quarter of 2008 we hit the Great Recession, automotive as one of the biggest end markets saw a massive compression in the business, and margins collapsed. That partially weighed on the name. I think they also carry a little bit of the legacy baggage from Tyco International, given the old Kozlowski days. TWST: Looking at that development, the increased content, are there changes in the companies in terms technology, output or M And A? Are we looking at those kind of developments? Mr. Passi: Some of that has occurred, and it varies industry to industry. In the connector industry, the companies that I cover here are TE Connectivity, Amphenol (APH), Molex (MOLX); the capacitor companies, Kemet (KEM); and the printed circuit board companies, TTM Technologies (TTMI). In the connector companies, we've seen some level of consolidation. The most aggressive acquirer in that space has been Amphenol; it's just a phenomenally well-run company, but M And A seems to be very much part of their DNA. The industry as a whole has also seen quite a bit of M And A. In fact, the top 10 companies now probably have almost 55%, 60% share. If you went back 15 years ago, it was probably closer to 40% to 45%, so they have gained some of that share. Some of it is organic, i.e., as their customers get bigger, their customers say, "We only want to use fewer supplies." And so they'll consolidate the supply base, and some of it is M And A. The printed circuit board, it's been very M And A centric. The distributors, Arrow and Avnet, have essentially rolled up the industry, and they continue to roll up the industry; very aggressive acquirers, very good at what they do, very capable at integrating M And A. Yes, we do see some of these dynamics in some of these industries, but they appear to be getting bigger. In terms of technological shifts, I think there is definitely some of that that goes on. From an I.P. perspective, especially compared to either software companies or other types of companies, communication equipment companies, they may spend anywhere between 3% and 5% of sales in R And D. So they are not very R And D intensive, but yes it is there. These are engineered products. At the end of the day there is R And D required, and so there are enhancements occurring in the product and also the processes that they employ to make these products that are ongoing, and have been ongoing for the past few years. The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online . The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations. For Information on subscribing to The Wall Street Transcript, please call 800/246-7673

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