PREVIEW-Outlook bleak for contract electronics makers

* Dim forecasts due when they report earnings

* Top picks in the group are Flextronics, Plexus

* Shares at all-time lows

* Analysts say impact won't be as bad as 2001

By S John Tilak

NEW YORK, Oct 22 (Reuters) - Contract electronics manufacturers Flextronics (FLEX.O) and Benchmark Electronics Inc (BHE.N) are expected to offer gloomy outlooks for the December quarter, traditionally their busiest, when they report earnings on Thursday.

Also known as electronics manufacturing services, or EMS, these companies produce components for tech giants such as IBM (IBM.N), Sun Microsystems (JAVA.O) and Philips Electronics (PHG.AS), which have all indicated that a slump was in store as fears of a global economic recession hurt their revenues.

"The problem with electronics manufacturing services companies is they're completely dependent on their customers and end demand. So when end demand is slowing, the EMS guys can't really grow faster than tech spending," Deutsche Bank analyst Sherri Scribner explained.

Shares of EMS companies like Flextronics International Ltd, Benchmark, Jabil Circuit Inc (JBL.N), Sanmina-SCI Corp (SANM.O), Celestica Inc (CLS.TO)(CLS.N) and Plexus Corp (PLXS.O) have on average lost about 50 percent of their value since Sept. 1.

Scribner said Sun's results should hit Benchmark and Celestica particularly hard as Sun makes up about 17 percent of Benchmark's business and 4 percent to 8 percent of Celestica's.

IBM is a customer of Flextronics, Celestica and Sanmina-SCI.

Most analysts said their top EMS picks are Flextronics, the market leader that supplies to a diverse group of industries, and Plexus Corp (PLXS.O) because it has the highest operating margins in the group.

Flextronics is trading at four times forecast 2009 earnings, while Plexus is trading at eight times. The EMS group on average trades at 18 times forward earnings.

"In this market, where everything is inexpensive, it's hard to justify paying a higher multiple for an EMS company when you could buy one of their customers, which probably is a little bit bigger and has much more diversification," Scribner said.

Longbow Research analyst Shawn Harrison said, "Plexus is one of the best-of-breeds in the EMS space. It is the only operator that earns their cost of capital."

He added Sanmina-SCI and Celestica, which are struggling to sustain earnings growth, may have to undertake job cuts to reduce costs.