M.B.A, University of Southern California. Dunne joined Robertson Stephens in 1996, inaugurating the firm's coverage of electronic manufacturing products and services companies. He has more than 15 years of financial analysis experience.
Industry Outlook and Style
Dunne, an All Star in our
Analyst Rankings - Equity 2000
(see our related
story) is bullish on the entire electronic and manufacturing products and services, or EMPS, industry. He notes that the group substantially outperformed the market in the 12 months ended in July, rising 170% vs. increases of 61%, 14% and 2% for the
Dow Jones Industrial Average
, respectively. Year-to-date numbers are equally impressive. Dunne says that, through the end of August, the EMPS industry had gained 50% vs. the Nasdaq's 4%, the S&P's 3% and the Dow 's 6%.
The Robertson Stephens analyst divides his coverage into four distinct groups, with picks in each.
Dunne's first group, power system companies, design and manufacture internal systems that convert alternating current from wall plugs to the direct current needed to power almost all electronic products. Companies in this subsector also produce DC/DC systems that provide the particular direct current voltage required by different electronic components. His top picks in this group are
. Dunne notes that, as leaders in the telecommunications and data communications power markets, respectively, both companies are extremely well-positioned: "Market demand for these products could grow by 20% to 30% annually for the next several years, to over a $15 billion market opportunity," he says.
The second group makes printed wire boards. PWBs are the basic building blocks for almost all electronic equipment. They provide the circuitry and mounting surface necessary to interconnect discrete components such as microprocessors, capacitors and resistors. According to Dunne,
, created by a July 1998 merger between Details and Dynamic Circuit, is a proven winner. Says Dunne, "Over the next few years, we expect DDi to grow more than 40% -- on 25% to 30% compounded growth in revenues -- as the company takes further advantage of the proliferation of electronics equipment and the growing demand for complex, quick-turnaround products and services."
The third group Dunne covers are the electronic manufacturing service names. EMS companies manage the supply chain for leading companies like
. They actually procure the parts, build the product, test it and, in some cases, ship it directly to the final user (to Cisco's customers, for instance).
Among the stocks Dunne likes in this $100 billion industry are
. He believes that the market "overreacted" to SCI Systems' Sept. 13 announcement of lower-than-expected earnings for its fiscal first quarter (the stock tumbled 18% that day). Dunne points out that the earnings shortfall was due merely "to parts shortages and short-term delays in two new program ramps."
Enclosure manufacturers comprise the fourth group. These companies fabricate the metal and plastic housings in, and perform integration services for, all this electronic gadgetry. Dunne's top pick in this sector is
, a company focusing on communications, high-end computing and the Internet. Its establishment as a leader in the fast-growing global electronic enclosures market has allowed it to benefit from the same outsourcing trends as the electronic manufacturing services industry. (Robertson Stephens has had an investment banking relationship with Power-One, DDi, Celestica and Solectron in the last three years.)
What continues to drive growth in this industry? Dunne cites three major forces: First, the proliferation of electronics is pervasive, and these markets are getting stronger, particularly in the communications area. Second, there is a trend among major original equipment manufacturers, or OEMs, like
toward outsourcing much of their production to EMPS companies. This has brought billions of dollars to the industry.
Acquisitions are the third major driver. Dunne points out, "We have identified over 150 acquisitions in the last 12 months that have added billions of dollars of opportunity to the industry."
According to Dunne, the crucial question for the industry is whether it can continue to grow at the current rate and whether managements can skillfully pilot companies that are expanding at such a fast clip. Several of these companies have increased revenue tenfold over just a few short years. Dunne points out that the largest, Solectron, was a $4.4 billion business in 1997. This year revenue will be close to $14 billion. Power-One, a leader in the power supply sector, took in $60 to $70 million in 1996. Dunne expects that figure to swell to $500 million this year, and he projects $750 million in revenue for next year. With these kinds of spectacular growth rates, Dunne asserts that investors should focus on the names with strong management, breadth of products and services, geographic diversification and the ability to quickly identify and integrate acquisitions.
This concern notwithstanding, Dunne believes "the fundamental business models within the $155 billion EMPS industry are intact and that returns on invested capital should remain at healthy levels, especially for service and product-based companies targeting the right applications."
Favorite stock for next 12 months:
"The two sweetest spots in the market right now are exposure to communications and the printed wire board industry: Sanmina has high exposure to communications customers -- their top-five accounts are Cisco, Alcatel (ALA) , Nortel, Lucent (LU) and Motorola (MOT) -- and it builds a lot of its boards in-house. Recently, Sanmina purchased Hadco, making it the largest fabricator of PWBs in the world. In addition, Sanmina has a very strong balance sheet and a proven ability to integrate companies."
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