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Why You Should Bet on Electronic Manufacturing Services

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It’s no secret that we are becoming an increasingly digitized species. Nor is it any secret that the average household uses about double the number of electronic devices that were used in our parents’ generation. If anything, this trend is accelerating, however strange that sounds – we’re already drowning in them!

Therefore, nobody has any doubts about the future of companies offering electronic manufacturing services. Market research firms have also provided their longer-term projections for the industry:

Fortune Business Insights thinks that the market will expand at a 6.8% CAGR from 2022 through 2029, driven by healthcare, auto and industrial. The research firm sees players adopting new technologies, including VR, IoT and 3D printing. A focus on sub-assembly manufacturing, testing, designing PCBs and component assembly and re-engineering is also expected to go far.

Mordor Intelligence is even more optimistic; it sees a 9.01% CAGR between 2021 and 2026 as the need to lower cost and increase efficiencies will drive more companies to EMS providers. Additionally, high demand will lead to capacity constraints and force companies to increase their outsourcing. Mordor also mentions special government initiatives in countries such as India, where a Production-Linked Incentive (PLI) scheme is expected to hugely boost EMS in the region.

Therefore, the longer-term outlook is strong and it is the near-term uncertainty, to do with the high inflation rate, rising interest rates, geopolitical tensions and their impact on oil prices, and the recession that could result from all of this that investors would be concerned about. How is this environment treating the EMS segment?

The answer to that question is actually quite surprising. While most of the discussion in the rest of the market is hovering around the demand side of the equation, the EMS segment is not seeing much issue on that front but rather on the supply side, where it is still component constrained, albeit not as much as earlier. The reason that the demand side remains so strong is that most of these players cater to markets with longer sales cycles. So their customers have to plan one or two, or several years out.

This offers much better visibility around future demand and allows for relatively steady demand. That’s why we’re seeing most industry players talk about accelerating programs, new wins, share gains, strong backlogs, in short, everything that you’d expect from a robust economic situation.

Given the encouraging outlook, I’ve picked three stocks that may be worth adding to your portfolio. All of them carry a Zacks Rank #1 (Strong Buy). They’re all seeing strong demand and have all diversified, primarily within the industrial, medical, auto (increasingly EV), defense and leading-edge technology markets. They have all built significant operating leverage, which is helping them expand margins, although the varying degrees of supply chain issues that they’re also seeing are an offsetting factor.

Jabil Inc. (JBL - Free Report)

Operating through the Electronics Manufacturing Services and Diversified Manufacturing Services segments, Jabil caters to the 5G, wireless and cloud, digital print and retail, industrial and semi-cap, networking and storage, automotive and transportation, connected devices, healthcare and packaging, and mobility industries. It is based in St Petersburg, Florida.

Diversification is a key strategy for Jabil and management says that no product or product family represents more than 5% of its business today. The breadth of expertise that enables this and the focus on emerging verticals like 5G, cloud, healthcare, packaging, connected devices, semi-capital equipment, and electric vehicles are largely responsible for the strong traction it is currently seeing in its business.

In the last 60 days, Jabil’s 2023 estimate (for the year ending in August) has increased 32 cents (4.1%) while the 2024 estimate increased 48 cents (5.8%).

Valuation of 9.6X P/E is cheap with respect to the S&P 500’s 17.9X and the industry’s 10.1X.

Sanmina Corporation (SANM - Free Report)

Sanmina Corp. provides integrated manufacturing solutions, components, products and repair, logistics, and after-market services worldwide through its Integrated Manufacturing Solutions; and Components, Products and Services operating segments. Most of its customers are original equipment manufacturers in the industrial, medical, defense and aerospace, automotive, communications networks, cloud solutions, clean technology, computing and storage, multimedia, and oil and gas industries. Sanmina is headquartered in San Jose, California.

Strong demand, strength in existing projects and new project wins, a pipeline of opportunities, a focus on important markets (industrial, medical, defense, auto), a certain amount of vertical integration in the supply chain, standardized equipment and standardized manufacturing processes across the world, and operating leverage are key differentiators of the business and are leading to consistent margin expansion. Sanmina has also taken advantage of the Indian government’s PLI scheme to set up a venture in India (along with Reliance Industries) that will cater to the whole world.

For the year ending in September 2023, the Zacks Consensus Estimate has jumped 74 cents (15.2%).

At 13.0X P/E, the shares are not cheap with respect to the industry, but they’re not too expensive considering their own trading range over the past year. The S&P 500 also trades at a higher multiple.

Plexus Corp. (PLXS - Free Report)

Plexus offers EMS services to OEMs requiring mid-to-low volumes in the higher-margin and high-growth segments of the healthcare/life sciences, industrial/commercial, aerospace/defense and communications markets.

Plexus is currently seeing a strong demand environment because of several new program ramps and new opportunities, share gains, a significant backlog, and participation in secular growth markets like warehouse and factory automation, vehicle electrification, commercial space and robotics-assisted surgery. The successful mitigation of supply chain challenges that Plexus continues to see is also contributing to sales.

The company’s share gains in semi equipment are helping to offset the softer outlook from some players with the net effect not expected to be significant to Plexus. On the other hand, the fact that it doesn’t have any operations in China is likely to be a positive given the recent U.S. restrictions. Therefore, management appears very optimistic about the company’s growth prospects in 2023.   

Analyst estimates echo this sentiment. The Zacks Consensus Estimate for the fiscal year ending in September 2023 is up 49 cents (8.9%) in the last 30 days. The estimate for 2024 is up 41 cents (6.7%).

At 17.6X P/E, the shares trade just below the S&P 500 multiple and very close to their median value over the past year.

One-Month Price Performance

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