Cross Research Managing Director Steven Fox Interview: Picking The Winners In The Electronic Components Sector

Wall Street Transcript

67 WALL STREET, New York - July 24, 2012 - The Wall Street Transcript has just published its Electronic Components Report. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Electronics Manufacturing Supply Chain - Secular Connector Demand Growth - Automotive, Data Center and Mobile Spending - Component Price Erosion

Companies include: Molex Inc. (MOLX), Amphenol Corporation (APH), Tyco Electronics, Ltd. (TEL), Belden, Inc. (BDC), SanDisk Corp. (SNDK), Corning Inc. (GLW), Apple Inc. (AAPL) and many others.

The following excerpt is from the interview with Steven Fox of Cross Research:

TWST: When we talk about electronic components, what exactly does that cover?

Mr. Fox: We cover a lot of categories within electronic components. At Cross Research, we focus on connector companies, such as Molex (MOLX), Amphenol (APH) and TE Connectivity (TEL); a company such as Belden (BDC) that manufactures specialty cables and connector products; printed circuit board makers, such as TTM Technologies (TTMI) and Multi-Fineline Electronix (MFLX), and EMS companies, such as Sanmina-SCI (SANM) and Flextronics (FLEX), which also manufacture printed circuit boards among other components. We also cover Jabil Circuit (JBL), who is an EMS provider, but also manufactures enclosures used in iPhones and iPads.

We also follow distributors, such as Anixter International (AXE), Arrow Electronics (ARW) and Avnet (AVT), which provide broader insight into component demand trends as they distribute a broad range of products from semiconductors, to connectors, capacitors and resistors, among other things.

We also follow storage, from hard disk drives to NAND flash companies, such as SanDisk (SNDK).

Finally, we follow Corning (GLW), which manufactures LCD glass for LCD monitors and TVs, as well as a range of glass used in handheld devices, such as iPads. Corning also is a leader in fiber-optic cable and hardware components. So it's a variety of different areas that generally falls on what we call the technology supply chain.

TWST: In general, what are some of the trends in the electronic component space? And what are you specifically watching in terms of investment trends?

Mr. Fox: In terms of trends, you can split it out two ways. You can talk about secular technology trends as well as end demand. Obviously, with all the tough headlines coming out of Europe, investors continue to first focus on end demand because the electronics industry has proven to be very cyclical. We look at the segments we follow as cyclical growth industries, but right now with pressures on demand in Europe, investors wonder about risks to growth, first and foremost. What we've been saying all year is that we see a very slow-growth environment.

Obviously, Apple (AAPL) is a very strong product in and of itself, but if you take Apple out of the PC market or the tablet market or the handset market, the growth and profits become much less impressive.

On the flip side, you are seeing good growth for companies that are selling into the automotive industry, which is having what you could describe as sort of a cyclical recovery after consumers in the U.S., in particular, underspent on new vehicles for a number of years. So companies, such as Sensata (ST) and TE Connectivity, are doing fairly well in the auto market.

And then, outside of that, the other area that I think is having decent growth, although I wouldn't say it's off-the-charts growth, is enterprise spending, especially in data centers. So because of rapidly rising storage requirements, not only for corporations, but also for consumer uses such as iCloud, for example, and in terms of what that's creating in terms of storage demand. You're seeing demand not only for storage, but a need to also build data centers that can manage that storage more efficiently and also do it in a way that is more focused on energy conservation. That's creating good opportunities for companies like Anixter and Corning, as well as Belden, that sell products into the data center that help improve efficiencies and expand capacity.

Having said all that, you add it all up, and our checks continue to see just a slow-growth environment for everything in aggregate that's sold in the electronics industry. However, it's not just because European demand is depressed. Certainly, the supply chain has done well in the past when European demand has been pressured. We think Europe runs at around 20% of all electronics demand. And while the U.S. is growing, it is growing slowly. China is not as robust of a growth market right now as it has been in the past and may represent some expectation risks as you go through the year.

TWST: What about the secular trends?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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