EMS Industry Woes

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Investors that chose Jabil Circuit (NYSE: JBL) as their top pick in the Electronic Manufacturing Service (EMS) should pat themselves on the back; the company has been the best performer over the past five years, even after considering the cliff it fell off from when it reduced guidance earlier this month. Only shares of Plexus (Nasdaq: PLXS) have performed better over the past couple of years. So what's the best pick going forward?

The best answer may be avoiding the space all together. Analysts had previously opined that EMS companies would be the first tech firms to recover from the dot-com bubble; companies looked to reduce costs by outsourcing capital intensive production to EMS firms that would benefit from manufacturing economies of scale. Well, for the most part, investors are still waiting for a recovery, though certain firms such as Jabil have proven adept at finding ways to grow. Solectron (NYSE: SLR), which reported results yesterday, has been one of the worst performing stocks for 2005 and shows no signs of recovery. The stock chart looks only marginally better for Sanmina-SCI (Nasdaq: SANM).

For a recent update on Jabil's third-quarter results, check out fellow Fool Dan Bloom's take. Overall the results were disappointing, but Jabil does have a much stronger track record and higher quality earnings than most of its competitors. It's also, as management contends, likely experiencing a number of shorter-term issues in its operations. In addition, one of the biggest considerations regarding EMS companies is the financial health and growth expectations of its largest customers. Jabil's client base is seen as more diversified and includes more stable firms such as Nokia (NYSE: NOK) and Hewlett-Packard (NYSE: HPQ). In contrast, a struggling Nortel (NYSE: NT) is one of Solectron's larger customers.

Investing in the Electronic Component Manufacturing (ECM) space -- as the EMS industry is also known -- has been filled with landmines, especially for those overly exposed to the putrid telecom sector. That may interest certain value investors who see a turnaround for some of the more beaten-down names. Plus, analysts still see growth on the horizon as firms continue to outsource manufacturing to enhance their own margins. I would prefer to invest in less competitive, less capital-intensive industries with higher margins (but then, I've already been burned by the likes of Solectron and Sanmina in the past). Perhaps I should have chosen Jabil or Flextronics (Nasdaq: FLEX), as they have held up better and analysts have become more optimistic about their prospects.

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Fool contributor Ryan Fuhrmann is long shares of Nokia and Nortel, but has no financial interest in any other company mentioned The Fool has an ironclad disclosure policy . Feel free to email him with feedback or to further discuss any companies mentioned.