High Tech Wars

By Freddie Mooche - Axcess Business News

A Japanese warship equipped with a high-tech Aegis missile detection system left for the Indian Ocean on Dec 9, a controversial move some analysts say signals support for a possible U.S.-led attack on Iraq.

Japan now has four of the ships, another is on order and funds have been requested for one more.

In other high tech circles, accounting software makers are trying to capitalize on a string of high profile scandals by developing computer programs that flag unusual bookkeeping and launch investigations with little human intervention.

As technology advances few components are as vital as the circuitry being used and most of that technology is U. S. property. During the boom and bust days of the semi conductor industry, trade swung from U.S. dominance to Asian markets and back again.

China too has been getting more involved as a world player in these fast-paced shifts of economies, providing many labor intensive tasks for lower wages that manufactures have chased around the world to find. In every shift of that economy, countries have been left with idle workers as competitive prices forced component manufactures to seek new sources.

While high tech economies continue to shift, American circuit manufacturing is still the dominant player. According to Standard & Poor's, their investment outlook for the S&P Electronic Equipment and Instruments Index is neutral overall, but they view positively the electronic contract manufacturing component of the Index. S&P also believes economic recovery may not occur until the second half of 2003, as the sub-industry group's recent 13-week decline supports their view that overall business spending will not recover that quickly.

S&P View of Electronic Contract Manufacturing Remains Positive

Industry fundamentals are improving; inventory levels have declined considerably, the book-to-bill ratio for printed circuit boards is well above trough levels, and production of goods is being shifted to lower cost world regions.

A trend toward out sourced manufacturing is gaining momentum, as companies seek to reduce costs while focusing on marketing and R&D efforts.

Over the long-term, technological and process innovations continue to spur demand for more advanced tools, aiding future earnings growth in the industry.

For electronic contract manufacturers, there has been a significant shift by computer hardware, networking and other vendors toward out sourcing manufacturing, and this trend shows no signs of abating.

Several companies are already showing signs of this shifting market, Jabil Circuit (NYSE: JBL) shares have climbed 14% in the last 30 days to close Friday at $18.30 after steadily declining from their 52 week high of $27.

A smaller player in the circuit board field, Integrated Performance Systems (OTCBB: IPFS) has shown similar swings in market trading to the Equipment and Instruments Index, closing up Friday 13.4% after being added to Axcess Business News "best picks" Stock Guide that morning. IPFS closed Friday at $1.10.

Although Integrated Performance had a 52 week high of $2.25, its shares faired better than JBL over that period showing similar declines but recovering on news of improved sales. The company had announced record volume of new orders on Nov 13 and announced an additional order on Nov 26, outpacing its Industry Groups overall performance.

(The above chart compares IPFS to JBL for the prior 52 weeks, IPFS is shown in black and JBL is in brown)

Where is the market going

Defense giants typically out source many component requirements to small companies. Axcess Business News had touched on that area in our prior Top Story, "From Smart Bombs to Smart Bags - technology is in demand."

While S&P remains positive to the contract manufacturing component of the Index, analysts believe some companies will outperform even Standard & Poor's positive view. The companies that may fair best are those with niche markets like Integrated Performance Systems (IPFS) whose commercial RF circuit boards are especially valuable in underdeveloped nations that do not have telephony infrastructure in place as many of these countries move into wireless applications.

High performance computers and telecom switching equipment require more advanced circuit boards with improved signal integrity, lower weight, lower temperature and superior impedance control. These types of boards, DWT, are a more expensive process to manufacture but carries many distinct advantages, as described above.

Analysts expect that niche market to expand in proportion to the increases in computing speeds. Currently, worldwide DWT revenue is estimated at $40 million with domestic sales accounting for 35% of that market. The two domestic suppliers are Integrated Performance Systems (OTCBB: IPFS) and Advanced Interconnect Technology. Advanced leads that market with sales of $10 million while IPFS sales were only $3.7 million. IPFS estimates it will surpass Advanced in sales through innovative design and high quality workmanship.

Advanced, a privately held company focuses most of its efforts in custom wafer bumping to the semiconductor industry in Hong Kong while still procuring R&D funding. Advanced Interconnect Technology's market share is therefore only an assumption given the company's foreign operations and R&D status.

Integrated Performance Systems RF circuit boards have strong potential as well and internationally provide the company with multi-market opportunities for a specialty niche circuit board manufacturer.

Jabil Circuit (NYSE: JBL) designs and manufactures electronic circuit board assemblies and systems for original equipment manufacturers in the communications, computer peripherals, personal computers, and consumer product industries. For the fiscal year ended 8/31/02, revenues fell 18% to $3.55 billion. Net income fell 71% to $34.7 million. Revenues reflect decreased production of computing and storage products. Net income also reflects an increase in restructuring charge.

Axcess Business News believes that both JBL and IPFS are growth companies. Although JBL's faced down markets for its products and shrinking margins while IPFS has had the opposite happen.

Based on S&P's sub-industry outlook as of Dec 14, JBL shares may be overpriced at $18.30 with the lowest pretax margin (1.8%) of all those companies shown in that S&P Sub-Industry Outlook. Axcess Business News noted that for Peer Groups with more than 15 companies or stocks, S&P's selection is based on market capitalization. IPFS's market capitalization is less than $10 million. However, IPFS manufactures products with significantly higher profit margins and less competition, and has shown as much growth as JBL has shown shrinkage.

It appears to Axcess Business News that IPFS is undervalued, even at its prior 52 week high of $2.25 its shares would still be undervalued against its Industry Group's Peers based on operating margin.

One of the lowest priced stocks in that S&P Industry Group is SigmaTron International (NasdaqSC: SGMA), which closed Friday at $3.87. SGMA had pretax profit margins of only 2.9% and had climbed and fell on the same curve as IPFS from its 52 week high of $5.09 to as low as $1.39 before recovering.

IPFS shows signs of exceeding both JBL and SGMA's pretax margins in 2003 and is showing no signs of slow growth, supporting Axcess Business News views toward its share price being significantly undervalued at its current level. The Company may see its value climb to between $4 and $5.00 by mid-2003 assuming it continues its fast paced growth in sales and earnings.

Axcess Business News will continue to report on the electronic equipment and instruments segment of the Information Technology Sector, and these companies activities, for our readers. Watch your in-box for any news alerts on this and other late breaking business news. If you're not a member, consider subscribing now and you can get these great market alerts too!

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