B.A., New York University. Labowitz joined Merrill Lynch in 1975. He currently heads a four-person team that covers connectors, capacitors and resistors, specialty wire and cable-and-electronics manufacturing services and distribution. Prior to joining Merrill, he held junior analyst positions at Alliance One Institutional Services and at Portfolio Strategy.
Industry Outlook and Style
Labowitz is extremely bullish on the electronic companies he follows. "I have more 1:1 ratings
buys than any other analyst at Merrill right now, " he contends. Of the 30 companies that he covers, he rates 18 a buy.
What's behind his optimism? Electronic technology. According to Labowitz, electronics make up a bigger proportion of the GDP than ever before. The industry continues to grow, mostly because of the boom in communications systems -- ranging from wireless to bay stations and large switching systems -- which have benefited companies throughout the supply chain. In addition, Labowitz continues to see favorable trends in the computer, automotive and industrial markets.
To illustrate what the companies in his universe do, Labowitz explains, "If you took a printed circuit board that is used in any piece of electronic equipment and took away the active components -- the semiconductors and microprocessors -- we follow the companies that make just about everything else on the board. Connectors, capacitors, resistors and even the board itself." He adds that he also covers the makers of the wire and cables that connect equipment, as well as electronic manufacturing service providers and some distributors who sell the products.
Among the connector companies, Labowitz has high praise for both
. "Molex is one of our core holdings "says Labowitz. "It continues to gain market share in all regions of the world, particularly Japan," he asserts.
As for the passive components sector, Labowitz says: "These are cyclical growth companies. The cycle now is clearly in their favor. And like connectors, their products are pervasively used in all electronic products." His favorite stocks in the group are
. Merrill took German-based EPCOS public last October, at $38. By November it had climbed as high as $177, though it currently trades in the low $90s.
In June Labowitz upgraded
from accumulate to a buy. The company, a global distributor of wiring systems and networking products, is, in his view, "an inexpensive way to participate in the growing demand for bandwidth and is an important beneficiary of outsourcing, deregulation and privatization in the telecommunications industry." In Merrill's June 29 report on the industry, he projected that the stock, then trading at $28.13, could go as high as $40 over the next 12 months. It currently trades in the low $30s.
The names that Labowitz is most excited about right now are the electronic manufacturing services providers, the companies that put everything together. In the last several years, they have experienced dramatic growth as original equipment manufacturers increasingly outsource the manufacture of electronic equipment to EMS providers. Labowitz asserts that companies such as
were early to recognize the benefits of outsourcing the assembly of the printed wire boards that go into their equipment. Since then, companies like
have joined the outsourcing bandwagon. Contends Labowitz, "The more they do it, the more they see the benefits, and they are doing it in increasing proportion."
With more and more OEM assets for sale, EMS companies have been purchasing multiple facilities, creating what Labowitz calls the mega-EMS providers. The Merrill analyst identifies as mega providers those companies with more than $5 billion in revenue, a global manufacturing footprint, supply chain management capabilities, top-tier OEM relationships, a broad array of services, and focus on technological innovation. The megaprovider names on his list include
In addition to these EMS behemoths, the niche EMS providers will play an important role, believes Labowitz. He asserts that providers such as
will experience higher-than-average growth, as they gain smaller programs and niche market opportunities that the larger EMS providers are not focused on serving." (Merrill Lynch has had an investment banking relationship with Amphenol, Anixter International, AVX, Celestica, EPCOS, Flextronics, Jabil Circuit, Kemet, Molex, Sanmina, SCI Systems, Solectron and Vishay within the last three years.)
Labowitz recommends EMS providers as a more diversified and less expensive way to invest in technology. He remarks, "We used to call the connector companies a chicken way to participate in electronics. Now perhaps it has shifted to EMS providers, who manufacture products for technology companies across several different market segments." Looking at the top-seven companies in the EMS group, Labowitz predicts a 33% growth for next year. But he warns, "EMS providers without a niche, nor a global manufacturing platform, could find it difficult to compete in the years ahead."
Favorite stock for next 12 months:
"At today's prices Solectron is selling at a discount vis a vis the industry. A leader in the industry, it is selling at a 37 multiple, and the group is 39. Leaders should sell at a premium to the group. That makes Solectron well undervalued."
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