Reality Check for EMS Stocks

Investors considering the electronics-manufacturing services sector haven't had much to inspire them over the past quarters -- even years -- and that trend hasn't changed much in the latest quarter.

Instead of consistent growth, EMS companies have offered investors consistent restructuring and a glut of inventory, rather than surplus profits. "The last two to three years have been a bit of a reality check for these guys, which tends to be more painful than not," says Amit Daryanani, an analyst with RBC Capital Markets.

The industry, which has traditionally assembled printed circuit boards for its original equipment manufacturer clients like PC companies and consumer-electronics firms, has tried to capitalize on the outsourcing trend, expanding their services into areas like design and repair services and branching out into new markets to grow.

But at the same time, a number of the companies are still rebuilding from the tech bust while scrambling to hold on to market share.

"Generally speaking, I would say that the EMS companies in the U.S are losing share to the Asian companies, specifically, Hon Hai," says Ben Lu, an analyst who follows the industry for J. & W. Seligman. His firm holds shares of Hon Hai, which is traded on the Taiwan Stock Exchange, and Jabil Circuit (JBL).

As the largest EMS provider in the world, Hon Hai's sales are expected to grow over 35% to more than $35 billion this year, Lu says. Its nearest competitor is about half its size: Singapore-based Flextronics (FLEX) upped its top-line guidance in the latest quarter to $19 billion for the full year.

By contrast, U.S. EMS companies have been left to take share from each other in a potentially shrinking pie, while trying to hold on to customers.