While Cisco Systems Inc's slowing business has hurt its suppliers, the latest twist in Cisco's fortunes may be a boon for contract manufacturers Jabil Circuit Inc and Solectron Corp, says Roger Norberg of JP Morgan Securities Inc.
Cisco plans to write off US$2.5 billion of parts and unfinished goods, clearing the decks for new, more profitable products. That means Jabil and Solectron, which assemble circuit boards and other goods for Cisco, aren't on the hook for the unused inventory, Norberg said.
"Cisco is set to take responsibility for ownership and liquidation" and that "should be a substantial relief," Norberg wrote in a report.
Jabil and Solectron shares have fallen as much as 60 percent from their highs of last year as investors worried the companies would be burdened by excess components that have accumulated because of slowing sales.
Cisco's move suggests other customers may also take responsibility for the unused inventory, even as new products make it obsolete.
"When the bottom dropped out of demand in the fourth quarter [of 2000] investors became nervous about potential [contract manufacturer] liabilities for unused and obsolete parts," Norberg wrote in a note to clients.
Though Cisco's move, announced yesterday, "does not eliminate every excess component in the channel, it should remove a large amount." Significant money is involved.
Solectron, for example, "may be carrying in excess of US$500 million in parts inventory that is earmarked for Cisco," Norberg wrote.
Cisco is Solectron's second biggest customer and Jabil Circuit's biggest.
Norberg is the first to signal it might be time to buy Solectron, Jabil or other companies that provide manufacturing services in anticipation of a turnaround for their customers.
Other analysts also spoke favorably about the effect of Cisco's inventory writedown. Only Norberg raised his ratings on the shares. He boosted Solectron and Jabil to "buy" from "long-term buy," which is one notch lower at JP Morgan.
Since January, Wall Street has been cutting ratings on the contract manufacturers. Seven firms downgraded Solectron after the Milpitas, California, company said on March 19 that profit would miss forecasts due to slowing demand from customers, including Cisco and International Business Machines Corp.
Jabil said the next day that its earnings also would be disappointing.
Norberg is right to be trumpeting the value of Cisco's move for the so-called contract manufacturers, said Jerry Castellini, president of CastleArk Management LLC in Chicago, which manages US$1.5 billion.
The decision "is the big-boy way to approach the problem" of excess inventory, Castellini said. "They are saying, `long-term, if we don't clean up, it's going to come back to bite us.'"
Castellini said he sold his shares of Jabil and Solectron in the third quarter of 2000, avoiding their declines. He is now deciding whether the time is right to return to the industry.
"I've got price charts of nine of [the companies] sitting on my floor right now," he said.
RISK REMAINS: An official said that with the US presidential elections so close, it is unclear if China would hold war games or keep its reaction to angry words The Ministry of National Defense said it was “on alert” as it detected a Chinese aircraft carrier group to Taiwan’s south yesterday amid concerns in Taiwan about the possibility of a new round of Chinese war games. The ministry said in a statement that a Chinese navy group led by the carrier Liaoning had entered waters near the Bashi Channel, which connects the South China Sea and the Pacific Ocean and separates Taiwan from the Philippines. It said the carrier group was expected to enter the Western Pacific. The military is keeping a close watch on developments and “exercising an
FIVE-YEAR WINDOW? A defense institute CEO said a timeline for a potential Chinese invasion was based on expected ‘tough measures’ when Xi Jinping seeks a new term Most Taiwanese are willing to defend the nation against a Chinese attack, but the majority believe Beijing is unlikely to invade within the next five years, a poll showed yesterday. The poll carried out last month was commissioned by the Institute for National Defense and Security Research, a Taipei-based think tank, and released ahead of Double Ten National Day today, when President William Lai (賴清德) is to deliver a speech. China maintains a near-daily military presence around Taiwan and has held three rounds of war games in the past two years. CIA Director William Burns last year said that Chinese President Xi Jinping
REACTION TO LAI: A former US official said William Lai took a step toward stability with his National Day speech and the question was how Beijing would respond US Secretary of State Antony Blinken yesterday warned China against taking any “provocative” action on Taiwan after Beijing’s reaction to President William Lai’s (賴清德) speech on Double Ten National Day on Thursday. Blinken, speaking in Laos after an ASEAN East Asia Summit, called the speech by Lai, in which he vowed to “resist annexation,” a “regular exercise.” “China should not use it in any fashion as a pretext for provocative actions,” Blinken told reporters. “On the contrary, we want to reinforce — and many other countries want to reinforce — the imperative of preserving the status quo, and neither party taking any
RESILIENCE: Once the system is operational, there would be no need to worry about the risks posed by disasters or other emergencies on communication systems, an official said Taiwan would have 24-hour access to low Earth orbit satellites by the end of this month through service provided by Eutelsat OneWeb as part of the nation’s effort to enhance signal resilience, a Chunghwa Telecom Co (中華電信) official said yesterday. Earlier this year the Ministry of Digital Affairs, which partnered with Chunghwa Telecom on a two-year project to boost signal resilience throughout the nation, said it reached a milestone when it made contact with OneWeb’s satellites half of the time. It expects to have the capability to maintain constant contact with the satellites and have nationwide coverage by the end
RSS