Producers of electronic equipment mainly for the OEM (Original Equipment Manufacturers)
Electronics Manufacturing Services (EMS) companies, found within the Electronics Industry,
provide production and design services to firms that utilize electronics components and printed-
Major firms in the communications, computing, wireless, consumer
electronics, test/instrumentation and other industries often hire these companies
for the purpose of reducing their cost of goods.
The EMS sector is highlighted by firms with
solid revenue prospects, though some probably rely on a few sizable customers, and
operating margins are usually narrow.
EMS firms typically attract
through their abilities to
manufacture products at a
reduced total cost
. These companies also tend to offer
expertise in production and design
well as supply-chain management capabilities that
allow for an accelerated time-to-market
ramping up of output volume. Other advantages to electronics companies of hiring EMS firms
improved inventory management and purchasing power, in addition to reduced
capital investment requirements
. As a result,
demand for EMS services has generally been
climbing, and more industries have been jumping on board.
The largest EMS entity covered by Value Line is
Flextronics International (FLEX),
derives a large proportion of its business from telecom (infrastructure and wireless) entities.
Names of other providers consist of
Jabil Circuit (JBL), Celestica (CLS), Sanmina-SCI
(SANM), Benchmark (BHE), and Plexus (PLXS)
The profit outlook for companies firms is bright for 2011. Demand from key industries is mostly
strong, based, in large part, to the vigorous market for handheld wireless products. Flextronics’
personal computing-related sales are likely to double this year, given deals to make tablet PCs.
Benchmark also should realize benefits of recently entered computing contracts. A healthy
market for consumer products ought to support top- and bottom-line gains, too, such as for
Celestica. On the other hand, however, there are some concerns surrounding soft demand from
the optical networking and defense industries, as recently indicated by Sanmina-SCI
At the same time, numerous EMS players’ share earnings will probably gain from increased
outsourcing activity in several emerging industries. As only less than 25% of production is
currently outsourced, there exist ample opportunities for growth from new customers. Examples
include those in the automotive, medical, and industrial control equipment fields. Revenue
growth from these markets may well outpace those from traditional outsourcers. Also, margins
could well widen, but spending is also required to ramp production programs to full volume.
Overall, margins for these companies are tight because of stiff competition with each other and