Merrill Lynch is putting pressure on contract manufacturers today, saying an already bad earnings outlook for these companies will get worse in the next few weeks. Jerry Labowitz downgraded seven companies in the sector to intermediate-term neutral: C-Mac Industries Celestica ( CLS), Jabil Circuit ( JBL - Get Report), Sanmina ( SANM - Get Report) and Solectron were cut from intermediate-term buy ratings. Flextronics ( FLEX - Get Report) and Plexus ( PLXS) were downgraded from intermediate-term accumulate. On a generally down day for stocks, each of these companies was being hit. C-Mac, for example, was off 7.9% to $27.32. Flextronics was losing 9% to $24.85. Labowitz told investors to expect warnings from the EMS nation, writing in his research note that there is no good news for these electronics manufacturing service companies. Their fate, after all, is chained to cement-shoed technology companies that have sliding profits and poor demand. To make matters worse, Labowitz wrote, EMS companies have moved into telecommunications equipment over the last few years, targeting a sector with few signs of a recovery. "Based on channel checks with various constituents in the supply chain, the rebound that management and investors have been expecting to take place later this year, we think could be more hope and wishful thinking then reality at this point," he wrote. "In fact, as each month passes, and the second-quarter of 2001 comes to a close, we believe it will be difficult to achieve even our conservative numbers for the September and December quarters." The stock market view of these companies has been bullish since April 4, when the broader market tacked on impressive gains. Since that time, for example, Celestica -- one of the biggest players in the space -- is up 114%. And there have been no significant changes made to the company's earnings outlook. It closed last Friday at $52.10, but is still nowhere near its 52-week high of $87. EMS companies do technology's dirty work, producing the everyday chips and gear that get sold with someone else's brand name pasted on. At the beginning of the year, as the tech world grappled with the severity of the economic slowdown, many analysts recommended EMS companies, thinking struggling tech companies would outsource even more production to save money. Instead, EMS companies by and large got the shaft as customers fought flaccid demand and bulging inventories. Labowitz stressed his long-term devotion to EMS companies, maintaining a long-term buy rating on all seven stocks he downgraded today.
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