Over the past six years, investing in the electronic manufacturing services (EMS) space has been about as painful as hearing Britney Spears utter the word "huh" over and over in her latest reality TV outtake (courtesy of YouTube.com). A long position in contract manufacturer Sanmina-SCI (NASDAQ:SANM) could qualify as most painful; things continue to be grim and the stock is trading near its all-time lows.
On Monday, Sanmina provided further details about the special committee formed to investigate the degree to which it's mired in the stock options-grant penalty box. The company said it's investigating if there were any stock option "discrepancies" in its financials. In other words, no conclusion yet, and management can't be certain what the financial impact might be, either.
This will also delay the filing of its 10-Q with the SEC for its quarter ended in July, but Sanmina hopes to be able to file within the next month or so. Back in late July, the company announced it was delaying its third-quarter earnings release and said that sales for the quarter fell 4%, which was below analyst forecasts. Other than that, it withheld further quarterly results, which in any case are expected to be nothing much to write home about because sales and margin trends remain dismal.
Sanmina clearly has its share of difficulties, but the EMS space overall is probably best avoided. EMS companies were supposed to be the first tech firms to recover from the dot-com bubble as other technology companies looked to reduce costs by outsourcing capital-intensive production to EMS firms that could theoretically benefit from economies of scale. Instead, a number of the larger clients are themselves still struggling to survive (for example, Lucent (NYSE:LU) and Nortel (NYSE:NT) are finding it difficult to offset a shrinking wireline telephone business), making any recovery in EMS land even more of an uphill battle.
A few EMS firms, such as Jabil Circuit (NYSE:JBL), have found ways to grow and remain profitable by focusing on higher-margin industries, such as medical equipment, that aren't as well-penetrated by other EMS firms. Others, such as Solectron (NYSE:SLR) and Sanmina, have been the worst performers among the largest EMS providers because they were unable to reduce capacity fast enough to offset the sudden drop in technology demand since 2000. However, all large EMS firms are badly lagging the S&P 500 over the past one, two, and five years.
In Sanmina's case, in addition to market-share losses and high debt, it now has stock option woes to deal with. Unless you have insight about a catalyst to improve operating performance, Sanmina and the entire EMS space will likely remain value traps, as they have been since the tech bubble burst in 2000.
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Fool contributor Ryan Fuhrmann is long shares of Lucent and Nortel but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email Ryan with feedback or to further discuss any companies mentioned.
