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Sector Snap: Electronic Manufacturing Services

NEW YORK (AP) -- A Raymond James analyst said Monday that the electronic manufacturing services industry continues to improve as a whole, but is still going relatively unnoticed by investors.

Brian Alexander said the larger, more diversified, companies with relatively cheap shares are the best investment bets in the sector. The companies make a wide range of products for a variety of industries ranging from telecommunications to defense.

"We continue to find that investors shy away from investing in the electronic manufacturing services industry due to a history of value destruction caused by overcapacity and poor capital allocation decisions," Alexander wrote in a note to investors.

The analyst said the industry has undergone significant changes that have made it more stable and profitable. He noted that the companies are using more of their capacities, have better balanced geographic footprints, serve a wider variety of markets and customers, and offer a more diverse range of products and services.

In addition, the companies are no longer paying steep premiums for acquisitions, are taking tougher looks at working capital levels and customer forecasts, and their management teams are more likely to walk away from bad businesses, he said.

Alexander raised his rating for Flextronics International Ltd. to "Strong Buy" from "Outperform," saying that the company is poised for profit growth and margin expansion, and boosted his rating for Sanmina-SCI Corp. to "Outperform" from "Market Perform," pointing to its product focus on the telecommunications, storage and defense markets.

He also backed his "Strong Buy" rating for Jabil Circuit Inc.

Flextronics shares rose 9 cents to $7.16 in midday trading, while Sanmina-SCI shares edged down 10 cents to $10.81. Jabil shares fell 38 cents, or 1.6 percent, to $23.82.

That came amid a steep drop in the overall market, as investors reacted to a slowdown in hiring.

The Dow Jones industrial average dropped 108 points to 12,951 at midday Monday. The Standard & Poor's 500 index was off 14 at 1,384, and the Nasdaq composite lost 27 points to 3,053.

Alexander also cut his rating for Celestica Inc. to "Market Perform" from "Outperform," citing its relatively depressed margins and higher costs, and lowered his rating for Benchmark Electronics Inc. to "Underperform" from "Market Perform," saying that he's not sure the company will be able to meet its own 2012 growth targets.

Celestica shares dropped 62 cents, or 6.6 percent, to $8.79, while Benchmark fell 88 cents, or 5.5 percent, to $15.21.