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Technology > Tech Investor
Contract killers
Companies that put together products for tech giants aren't seeing signs of demand. Not good.
June 5, 2003: 2:04 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - If you want to know whether demand for high-tech is really improving, then take a look at the contract manufacturing industry. It's the proverbial Tweety bird in the tech coal mine.

Companies like Flextronics, Sanmina-SCI, Solectron and Celestica, known also as electronic manufacturing services (EMS) companies, are like the Barry Manilow (look out for that wall!) of tech. They build the products that make the tech world sing.

Flextronics makes printers for Hewlett-Packard and Xbox consoles for Microsoft, for example. Sanmina and Solectron both make servers for IBM. Celestica assembles cell phones for Motorola.

These contract manufacturers took a big hit during the tech downturn, even though more companies sought to outsource manufacturing to cut costs. Simply put, low demand for tech in general hurts these companies. Similarly, they should be among the leading beneficiaries of a tech renaissance.

Stocks are up. Earnings and sales aren't.

In fact, shares have bounced back strongly as of late along with the rest of the sector. The average gain for the four big EMS stocks is 42 percent since March 11.

Wednesday was a particularly good day for the group, thanks to seemingly positive comments from Flextronics in its mid-quarter update on Tuesday. Shares of Flextronics surged 14.3 percent. Celestica's stock gained 11.3 percent and Sanmina-SCI shot up 14 percent.

Flextronics reaffirmed earnings guidance and said that business is getting better. But its forecast still is below what analysts had been expecting before a company warning in April.

This is a recovery?
Estimates have come down for 4 big EMS companies...but not the stock prices.
Company EPS Est (on 3/11) EPS Est. (Now) Price change since 3/11 
Flextronics $0.10 $0.06 37% 
Celestica $0.10 -$0.04 36% 
Sanmina-SCI $0.02 $0.01 65% 
Solectron $0.01 -$0.03 32% 
 * Est. for current quarter
 Sources:  FirstCall, Thomson/Baseline

And though it said business is getting better, that's coming at the expense of competitors -- management added that there was little pickup in demand for tech products. Indeed, it expects sales growth of barely 1 percent.

The other big EMS companies have also had their earnings estimates for the current quarter trimmed over the past three months. And the sales picture looks similarly bleak. Analysts are predicting a revenue increase of less than 1 percent for Sanmina-SCI and double digit sales declines for Celestica and Solectron.

This echoes the near-term outlook from another so-called "tech canary" earlier this week. Ingram Micro, the largest distributor of computers, reaffirmed its fiscal second quarter guidance on Tuesday. The company said it was on track to earn between 9 and 12 cents. Analysts are expecting 11 cents a share. Good news...until you look back and realize that analysts were predicting earnings of 16 cents a share before the company warned in April.

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It is difficult to envision a robust tech spending recovery if companies that rely on the industry colossuses aren't showing signs of strength. The latest CIO magazine tech spending survey, also released this week, showed that corporate chief information officers now expect tech spending to increase 3.3 percent over the next 12 months, down from predictions of 4.2 percent growth a month ago.

Better than a decline to be sure, but not cause for the raucous celebration going on in the markets the past few months.

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