PREVIEW-Contract electronic makers look to strong Sept quarter
* Cos expected to mostly beat market expectations
* Cos to benefit from improved demand from OEMs
* Recovering PC markets, consumer spending to boost demand
By Mansi Dutta
BANGALORE, Oct 21 (Reuters) - When contract electronics makers report quarterly numbers, investors will be looking for indications of a broader recovery in tech spending.
Analysts expect companies such as Flextronics (FLEX.O), Benchmark Electronics (BHE.N) and Sanmina-SCI Corp (SANM.O), to mostly surpass Wall Street estimates for the September quarter on the back of improved consumer demand and aggressive cost cuts since the first half of 2009.
Electronic manufacturing service (EMS) providers make products for OEMs such as Sun Microsystems (JAVA.O), Intel (INTC.O) and IBM (IBM.N). A spike in orders for EMS companies would indicate strengthening demand in end markets.
In the past one year, these companies have struggled with increased competition, costlier raw materials and waning demand.
Demand was impacted as businesses cut capital expenditure in the past several quarters, leaving them with aging equipment and higher operational costs.
With the economy showing signs of a recovery, the stage is now set for a spike in demand for new equipment from OEMs.
"Global demand has experienced improved trends and overall demand is healthy with notable strength in handsets and LCD TVs, while PC demand sounds constructive and telecom equipment trends are showing a healthy rebound," Brian White, an analyst with Ticonderoga Securities, said.
Jabil Circuit (JBL.N), which reported solid fourth-quarter results late last month, set a positive tone for the EMS group.
The company, which makes handsets for Nokia (NOK1V.HE) and computer hardware for Hewlett-Packard Co (HPQ.N), also guided first quarter above analysts' expectations. Intel's and IBM's smashing quarterly results further fuel optimism of a broader tech sector recovery.
Analysts are looking forward to even stronger December numbers from EMS companies helped by the year-end budget flush and stabilizing demand in the enterprise space.
"Information technology spending is starting to pick up in the September quarter, and should be better in December and budgets for 2010 should also improve," Louis Miscioscia, research director at tech-focused U.S. research firm Brigantine Advisors, said.
Shares of EMS companies, which are trading at 5 to 8 times their 52-week lows touched in November last year, are expected to continue their rally in the near term.
RBC analyst Amit Daryanani said he expects Flextronics to benefit from improving consumer markets and the recovery in the PC business.
Flextronics, based in Singapore, makes many of the high-tech items sold under labels that range from Hewlett-Packard Co, Acer Inc (2353.TW) to Dell Inc (DELL.O).
"The new PC ramps actually position the company positively ahead of what we anticipate will be a significant PC upgrade cycle in 2010," Daryanani, who recently raised his price target on the stock, said.
In July, Flextronics had forecast second-quarter revenue below Wall Street estimates, dashing hopes of an uptick in general electronics demand in the second half of 2009.
Benchmark Electronics, too, is expected to benefit from a rebound in enterprise spending in the near term.
Analyst Brian Alexander at Raymond James said in a note he sees an upside to his sales forecast for Benchmark, as enterprise computing has picked up over the past few months. Company name Period EPS* Revenue* Reporting date Flextronics Q2 $0.09 $5.76 bln Oct. 26 Benchmark Q3 $0.20 $493.5 mln Oct. 27 Sanmina-SCI Q4 ($0.11) $1.26 bln -- Celestica Inc Q3 $0.15 $1.5 bln Oct. 22 Plexus Q4 $0.31 $399 mln Oct. 28 * Analysts' estimates according to Thomson Reuters I/B/E/S, excluding options expenses. (Reporting by Mansi Dutta in Bangalore, additional reporting by David Lawsky in San Francisco; Editing by Unnikrishnan Nair)
