Strong Demand For Electronic Components Companies According To UBS Investment Bank Senior ANlayst; Industry Historically Showing 6% CAGR
August 1, 2011 - The Wall Street Transcript has just published Electronic Components Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Amitabh Passi is a Technology Analyst at UBS Investment Bank, where he covers the technology supply chain and NA wireless sectors. He joined UBS in 2005 as an Associate Analyst on the communication equipment team, and during his tenure has been part of a top-three ranking team in Institutional Investor's All-America Research Team survey. Prior to joining UBS, Mr. Passi held several technical and business development management positions at Nortel Networks. He holds an MBA from Columbia University.
TWST: Please give us an overview of your coverage in the electronic component space.
Mr. Passi: There are basically three or four different subsectors that I cover. One area is the passive component space. These would be connector companies. I cover a capacitor company, and I cover one company that makes printed circuit boards. I also cover a couple of the large EMS companies. These are the electronic manufacturing service providers, essentially companies that manufacture product for many of the large tech, and increasingly industrial, OEMs. And these companies would include Flextronics (FLEX) and Jabil (JBL).
TWST: It seems like demand is everywhere for the component companies. Is that accurate?
Mr. Passi: I think it is. What's interesting is this is an industry that has grown in line to maybe slightly above GDP in the 6% CAGR range - that's the long-term compounded annual growth rate - over the last 20 or 25 years. But to your point, yes I do think demand is everywhere. And what's hard to quantify and ascertain is it seems like we might be at an inflection point, where I feel you could potentially see growth rates, at least in the short to midterm, that could be faster than the long-term growth trajectory. The reason I say that is everybody is buying smartphones today. If I go back to content differential, low-end phones, as I said, would probably consume $0.50 to $1 in content.
And we are now looking at mid- to high-end phones consuming $3, $4, $5. That's almost a three times, four times increase in the amount of content being consumed. We can see a similar situation with TVs. The old analog TVs, CRT TVs, didn't really consume a lot of connector content. But now you look at LCD TVs, and you have an array of content. Similarly, we talked about a lot of the end markets, whether it would be automotive, some of the new planes in Boeing and Airbus - they consume almost three times to four times as much content. I do think that demand is everywhere. As I said, historically this is an industry that's grown at 6% CAGR. Over the next 30 years, my guess is that probably it sustains the growth rate, but it almost seems shorter term we might be in a period where we could be seeing a bit of an acceleration in the growth trajectory.
TWST: Looking at your universe, what are your top picks right now and why?
Mr. Passi: One of my favorite names is TE Connectivity. They used to be called Tyco Electronics. It's the largest connector manufacturer, and it has roughly 20% share in the industry. This is a company that was spun out of the old Tyco. They went public mid-2007. So by the third, fourth quarter of 2008 we hit the Great Recession, automotive as one of the biggest end markets saw a massive compression in the business, and margins collapsed. That partially weighed on the name. I think they also carry a little bit of the legacy baggage from Tyco International, given the old Kozlowski days.
But this is a company that I think is extremely well run. They've shed off almost $2 billion worth of product lines after they went public. They've consolidated the manufacturing footprint from roughly about 130 plants to 85 to 90. It's a company that currently supports 2% dividend yield. They've been buying back stock since they went public at roughly about 2.5% rate per year. We foresee double-digit EPS growth over the next three to five years, free cash flow generation that's $1 billion-plus per year, and it's currently supporting about 8% to 9% free cash flow yield.
TWST: What other companies do you like?
Mr. Passi: The other interesting one in my space is TTM Technologies. As I mentioned, this company makes printed circuit boards, and printed circuit boards are bare elements required for electronics devices, typically those green boards at the heart of electronics systems. If you ever ripped apart a computer or a phone, you'll see a bunch of components that are mounted on this green-looking board. TTM makes just the board, and then the EMS guys will assemble the components on the board. The interesting thing about TTM is they made a big acquisition in 2010, they announced it in November of 2009 and closed around April 2010.
This company is called Meadville, and Meadville basically doubled TTMI's size. So they doubled the size pretty much overnight and also got them into key end markets, such as smartphones and exposure to Apple (AAPL). TTMI in my space is a good secondary or derivative player on Apple; they do iPads, they do MacBook Airs for Apple.
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