It's an old business maxim -- we'll sell our products for less and make up the difference with volume. Sometimes it works out, but a lot of times you just start a price war that hurts everybody (see also: the ongoing printer wars). The Chinese electronics assembler Nam Tai
Sales in the second quarter were up more than 25% on higher sales of the company's cell phone components and assemblies. As I've discussed in the past, though, this move toward greater reliance on components and assemblies comes at a cost -- the cost of margins. Gross and operating profits were up only 7% as the company saw year-over-year declines in its margins.
That said, Nam Tai did post very respectable sequential margin improvements. So the company has ratcheted down to a different sort of business model, but management is still squeezing a lot out of the business.
Although the company has continued to announce new wins for products such as scanner pens, LCD modules, and consumer goods like the Sony
I have a hard time criticizing Nam Tai management for this ongoing shift toward cell phone assemblies while it's still working so well. Nevertheless, I would just like to see a more balanced type of business. After all, a good global cell-phone market hasn't guaranteed stock-market success recently for Nokia
Not many growing tech plays pay a dividend, let alone as high a dividend as Nam Tai. What's more, present valuations would seem to ignore Nam Tai's superiority in margins and current growth versus comparable companies. Perhaps Nam Tai should get some discount for being so dependent upon cell phones, but present prices still seem to be overdoing it.
For more on Nam Tai and other contract manufacturers:
- Should Investors Select Solectron?
- Nam Tai Phones It In
- Solectron's Not a Goner
- Nam Tai Shares the Wealth
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).