The following excerpts from a recent EMS industry report and company analysis, prepared by investment bank JPMorgan and interpreted by VentureOutsource.com, highlight a few positive and challenging points for Benchmark Electronics.
Management execution
Benchmark Electronics appears to be a well-managed and focused EMS provider. The Company specializes in high-mix and low-volume production for the high-end computing and storage, telecom and industrial electronics, medical electronics, and test and instrumentation electronics markets.
Between 2003 and 2006 Benchmark earned an operating profit margin just above four percent, placing it near the top of the EMS industry for operating margin metrics. However, Benchmark started to struggle after its acquisition of EMS provider Pemstar (which closed in January 2007).
The Pemstar acquisition failed to offset the much larger than expected 42 percent year-over-year sales decline Benchmark Electronics experienced with its largest customer, Sun Microsystems (related to Sun Microsystem’s dual sourcing strategy) in 2007.
Benchmark Electronics’ operating margins hit a low of 2.6 percent in September 2007 and sales growth stalled throughout 2007. While the Company’s overall profitability has improved since then, Benchmark Electronics operating margin of 3.3 percent (March 2008) indicates more management execution improvement is needed to get back to its normalized margin level of 4 percent plus.
Customer sales and revenue
Over the last twelve months, Benchmark Electronics has won more than US$430 million of new programs across various end markets. The timing and pace at which these new programs will be able to ramp up is something OEM executives should consider as they might consider their programs for the Company.
Meanwhile, by the end of the March quarter, Benchmark Electronics had more than $4 in net cash per share and its balance sheet remained under leveraged with a debt to capital ratio below one percent, which is the lowest among its peers, putting Benchmark in a position to possibly announce another stock buyback or possibly even execute an accretive acquisition.
Growth in Company sales remains a challenge. Benchmark’s sales growth stalled in 2007, and JPMorgan believes the Company’s prospects in 2008 don’t appear much better with expected growth of two percent to five percent (down from five percent to eight percent guided previously), well below its historical double-digit average level of 15 percent growth since 2001.
While Benchmark has exercised efforts (voluntary and involuntary) to diversify away from its largest customer, Sun Microsystems (Sun was 19% of total sales in March 2008 vs. 25% in March 2007 and 37% in March 2006), it remains to be seen whether management can attract enough programs to make up for the declining Sun Microsystems business.
Source: JPMorgan, VentureOutsource.com, June 2008
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