How to Profit From Electronic Manufacturing Services

New business opportunities are appearing for the electronic manufacturing services sector. According to data from iSuppli, the EMS industry's long-term trends are positive, driven by growing demand for aftermarket services and increasing consolidation. The outlook is even better for the so-called non-traditional or emerging EMS sectors such as industrial, renewable energy, clean tech, and medical. Because outsourcing penetration in these segments still remains relatively low -- 5% to 10% -- the companies that position themselves as leaders in these areas will be the ones that enjoy higher growth.

Let's analyze how three players are performing and what their plans are looking ahead.

Looking to regain growth
Plexus (NASDAQ: PLXS  ) provides product conceptualization, design, manufacturing, and sustaining solutions to industrial producers worldwide. The company's third-quarter results were not very good despite the fact that earnings beat management's expectations. Profit edged down 1.4%, driven by an overall decline in sales, and EPS reached $0.68.

The loss of its contract with Juniper Networks will have a negative impact in revenue growth in the short term. Juniper provided $365 million for Plexus, roughly 16% of revenues in fiscal 2012. This will reduce revenues by more than $100 million in fiscal 2013 and make 40,000 square feet of the Neenah facility remain fairly idle, affecting top-line growth and profitability.

Considering the context, the strategy for the company will be to focus on the increasing outsourcing trend in the health care, industrial, and defense and aerospace sectors. These new $2.4 billion manufacturing opportunities represent a huge opportunity for Plexus.

Another important initiative is to keep costs low and improve margins. That's why Plexus shifted its production and established a presence in low-cost regions such as Mexico, Malaysia, and Romania. Total manufacturing capacity will reach 2 million square feet by 2013, up from 1.8 million square feet last year.

Although Plexus has managed to make improvements in productivity and operational efficiency, the demand environment remains sluggish, damaging its growth rate in the near term.

Diversifying and expanding
Jabil Circuit (NYSE: JBL  ) provides worldwide electronic manufacturing services and solutions.

The company posted mixed results for its third quarter. EPS reached $0.48 and revenues of $4.47 billion increased 5.1% from the year-ago quarter. A growth factor was a strong performance in its high-velocity and enterprise and infrastructure segments, which offset the weak performance of the diversified manufacturing segment.

Just like Plexus, the company is looking for diversification. Jabil Circuit is moving away from mature sectors like networking, enterprise computing, and consumer electronics toward higher-margin emerging EMS sectors. The company is focused on growing in the lower-volume end markets like automotive, aerospace, and medical. Things are working. Its new contracts will bring more than $20 billion in revenues this fiscal year, representing a 16.3% rise year over year.

Plus, the company possesses ample liquidity to realize its growth plans. Cash and cash equivalents were $1.35 billion by the end of May, up from $1.06 billion. Cash-flow generation this quarter was $504 million, compared to $154 million a quarter before.

Looking ahead, the recent $665 million acquisition of Nypro is expected to provide new customers, raise Jabil Circuit's competitive position in health care, and expand in packaging services for the food and beverage, household, and personal care industries. In addition, its increasing association with Apple will expand growth prospects. Apple accounted for 13% of revenues in fiscal 2012.

Suffering from federal spending cuts
Raven Industries (NASDAQ: RAVN  ) is an industrial manufacturer that operates primarily in the USA.

The company's second-quarter earnings were $0.23 per share, down 28% year over year. Total revenue was $93.4 million, an 8% decrease compared to the prior year. The main driver behind these poor results was the federal spending constraint, which has affected Raven's Aerostar segment, making it drop 23% year over year.

However, Raven expects to get back on track and return to its historic earnings growth level in the next fiscal year, mainly through acquisitions. The company is optimistic on OEM demand coming from Brazil and Argentina. Certain agriculture solutions, especially steering systems, are experiencing strong demand.

However, future earnings for Raven might be affected by the challenging environment, falling commodity prices, and lower manufacturing efficiencies due to the start-up costs for new products. If Raven wants to remain profitable, I believe it will have to readapt its business from electronic manufacturing services to a more technology driven company.

Bottom line
If Plexus manages to increase its presence within high-growth segments, I believe the company could outperform its peers over the long term. However, we should monitor the development of its new sales contracts and overall performance.

Jabil Circuit is on the path for growth driven by its revenue channels' diversification and the higher performance of non-traditional sectors. I am optimistic about this company.

Raven will have to work hard to compensate for government uncertainty, mainly through an expansion in proprietary technology development. Until I start seeing improvements, I would stay away from this stock.

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