The electronics manufacturing services (EMS) industry is not that popular among the general investment community. The technology industry tends to be sensitive to economic cycles, so, getting into this sector when the economy is getting out of recession is the perfect time to invest. Let’s dig in to find some gold!
First, we’ll take a look at Nam Tai Electronics, Inc. (NYSE:NTE). The stock appreciated over 160% in 2012, thanks to the 118.6% year over year increase in revenue driven by the ramp up of the production of high-resolution liquid crystal display modules (LCMs) for tablets, and the commencement of mass production of high-resolution LCMs for smartphones.
Gross profit increased a whopping 449.4%. While it is unlikely the company will be able to generate the same stellar returns in the coming years, but is it still a good investment?
Slow yet steady growth ahead
The company reported that its profit margins will be under pressure this year due to increasing competition. But, this short-term headwind will be offset by increased capacity utilization. Despite the massive year over year jump in revenue in 2012, the average capacity utilization for the last quarter in 2012 was under 30%.
As the EMS industry grows, the business for the company would increase, due to which management expects to reach full capacity utilization in 2013. The company currently has a turnover capacity of $3.6 billion annually. Even if we assume an operating margin of 5.6%, moderately less than its current margin of 6.69%, it would still result in an income of over $200 million.
Healthy cash levels and appealing dividend
The company’s cash position is very strong. As of December 2012, Nam Tai Electronics, Inc. (NYSE:NTE) recorded $363 million in total stockholders’ equity, $158 million in cash, and only $13 million in debt. The company has a robust dividend yield of 4.6%. So, that’s a huge positive for long-term investors to earn a decent return.
The company has a forward P/E of 8.54, which makes it undervalued for a company which has robust growth opportunities ahead, one of the best operating margins in the industry, a strong balance sheet, and an above average dividend.
Down but not out
As a soon as a company reports numbers below estimates and issues a weak guidance, bears come rushing in and push its stock to oversold levels as if one earnings miss means the end for the company. Fortunately, it provides amazing opportunities for value investors to buy fundamentally sound stocks at a great bargain price.
This is what is going on currently with Jabil Circuit, Inc. (NYSE:JBL). Last month, the company reported earnings of $0.43 per share, compared to $0.46 in the same quarter last year and its guidance for the ongoing quarter was below estimates. As a result, the stock is down over 15% from its January highs.
One of Jabil Circuit, Inc. (NYSE:JBL)’s biggest customers, RES.IN MOT.DBA BLACKBERRY (FRA:RI1), is putting strong efforts in bringing the company back on track. BlackBerry managed to earn a profit of $94 million in the fourth-quarter of its fiscal 2013, and reported sales of roughly 1 million RES.IN MOT.DBA BLACKBERRY (FRA:RI1) 10 devices.
RBC Capital Markets reports that 45% of Z10 users are coming from iPhone or Android. It recently received its largest ever single largest order for over 1 million BlackBerry 10 devices. The company will be launching a set of new phones using its BlackBerry 7 OS which will improve its foothold in the emerging markets. As RES.IN MOT.DBA BLACKBERRY (FRA:RI1) regains its foothold in the market, it will be a huge boost for Jabil Circuit, Inc. (NYSE:JBL)’s growth.
Jabil Circuit, Inc. (NYSE:JBL) recently acquired Nypro Inc., which specializes in making plastic products. Nypro Inc. already has more than $1 billion in revenue. The combination with Nypro would open an exciting new market for the company. Apple Inc. (NASDAQ:AAPL) is rumored to be planning on a cheaper iPhone to gain further market share in countries like China and India.
According to RBC analyst Apple Inc. (NASDAQ:AAPL)will try to sell it under $400. Analysts estimate the cheap iPhone will generate $22 billion in sales in 2014. Jabil Circuit, Inc. (NYSE:JBL) already produces aluminium casing for Apple Inc. (NASDAQ:AAPL)’s iPhones and if Apple Inc. (NASDAQ:AAPL) does comes out with a cheaper version with plastic casing, then this acquisition will prove to be a huge boon for the company.
Besides the above mentioned growth factors, Jabil Circuit, Inc. (NYSE:JBL) also pays a healthy dividend yield of 1.9%, which will ensure a steady return on your capital till the market gives the company its fair valuation. Considering the above factors, a forward P/E of 6.28 clearly seems below par. Analysts have a median price target of above $22, which is a whopping 31% ahead of its current price.
Foolish takeaway
With the economy slowly coming out of recession, discretionary spending among consumers will increase, leading to strong growth for these companies. Both the companies are relatively cheap and once the Street realizes their growth potential, their prices are only going to go northwards.
The article A Sneaky Way to Play the Consumer Electronics Boom originally appeared on Fool.com is written by Rahul Giria.
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