Why you should bet on electronic manufacturing services

It’s no secret that we’re becoming an increasingly digitized species. It’s no secret that the average family uses twice as many electronic devices as our parents’ generation. If anything, this trend is accelerating, however strange that may sound — we’re already drowning in it!

Therefore, no one doubts the future of companies providing electronic manufacturing services. The market research firms also provided their long-term forecasts for the industry:

Fortune Business Insights believes that the market will expand at a compound annual growth rate of 6.8% from 2022 to 2029, driven by healthcare, automotive, and industry. The research firm sees gamers embracing new technologies, including VR, IoT, and 3D printing. It is also expected to bring focus on manufacturing, sub-assembly and testing, PCB design, component assembly and re-engineering away.

Mordor Intelligence is more optimistic. is seeing a 9.01% CAGR between 2021 and 2026 as the need for cost reductions and increased efficiencies will drive more companies into EMS service providers. In addition, high demand will lead to capacity constraints and force companies to increase outsourcing. Mordor also mentions private government initiatives in countries such as India, where the Production Linked Incentive (PLI) scheme is expected to significantly enhance the environmental management system in the region.

Therefore, the long-term expectations are strong, which is the uncertainty in the near term, due to the high rate of inflation, higher interest rates, geopolitical tensions and their impact on oil prices, and the recession that could result from all this. Investors will be worried about. How does this environment address the EMS sector?

The answer to this question is actually quite surprising. While most of the discussion in the rest of the market revolves around the demand side of the equation, the EMS sector doesn’t see so much of an issue on this front but rather on the supply side, where it is still constrained by component, though not as much as before. The reason the demand side remains so strong is that most of these players cater to markets with longer sales cycles. So their clients have to plan for a year or two, or several years.

This provides a much better view of future demand and allows for relatively stable demand. That’s why we see most players in the industry talking about software acceleration, new earnings, equity gains, strong backlog, in short, everything you would expect from a strong economic situation.

Given the encouraging outlook, I picked three stocks that might be worth adding to your portfolio. All of them carry a Zacks #1 rating (Strong Buy). They are all seeing strong demand and have all diversified, primarily into industrial, medical, automotive (increasingly EV), defense and leading technology markets. They’ve all built significant operating leverage, which helps them expand margins, although the varying degrees of supply chain issues they’re seeing is also a balancing factor.

JBL Company

Operating through diversified electronics and manufacturing services, Jabil serves the 5G, wireless and cloud, digital print and retail, industrial and semi-cap, networking and storage, automotive and transportation, connected devices, healthcare and packaging, and mobility industries. It is headquartered in St. Petersburg, Florida.

Diversification is a key strategy for Jubail and management says no product or product family represents more than 5% of its business today. The breadth of experience enabling this and focus on emerging sectors such as 5G, cloud, healthcare, packaging, connected devices, semi-capital equipment, and electric vehicles are largely responsible for the traction it is currently experiencing in its business.

In the past 60 days, Jubail’s estimate for 2023 (for the year ending August) has increased by 32 cents (4.1%) while the estimate for 2024 has increased by 48 cents (5.8%).

A valuation of 9.6XP/E is cheap compared to 17.9X for the S&P 500 and 10.1X for the industry.

Sanmina Sanem Company

Sanmina Corp. provides turnkey manufacturing, components, product, repair, logistics and after market solutions worldwide with its integrated manufacturing solutions; and components, products and services operating segments. Most of its customers are OEMs in the industrial, medical, defense, aerospace, automotive, telecom networking, cloud solutions, cleantech, computing, storage, multimedia, and oil and gas industries. Sanmina is headquartered in San Jose, California.

Strong demand, strength in existing projects and new project gains, pipeline of opportunities, focus on important markets (industrial, medical, defense, automotive), a certain amount of vertical integration in the supply chain, standardized equipment and standardized manufacturing processes across the world, operating leverage is Key differentiators for business and lead to steady margin expansion. Sanmina has also leveraged Indian Government PLI scheme to set up a venture in India (along with Reliance Industries) that will cater to the entire world.

For the year ending September 2023, the Zacks consensus estimate jumped 74 cents (15.2%).

At 13.0XP/E, the stock isn’t cheap as far as the industry is concerned, but it’s not outrageously expensive considering its trading range over the past year. The S&P 500 also trades at a higher multiple.

Plexus Corp. PLXS

Plexus provides EMS services to OEMs with medium to low volume demands in the Healthcare/Life Sciences, Industrial/Commercial, Aerospace/Defense and Telecom sectors.

Plexus is currently experiencing a strong demand environment due to several new software ramps and new opportunities, stock gains, significant backlog, and participation in secular growth markets such as warehouse and factory automation, vehicle electrification, commercial space, and robot-assisted surgery. Successful mitigation of the supply chain challenges Plexus continues to see contributes to sales.

The company’s share gain in semi-equipment helps offset softer expectations from some players with a net effect not expected to be significant for Plexus. On the other hand, the fact that there are no operations in China is likely to be a positive given the recent US restrictions. Therefore, management seems very optimistic about the company’s growth prospects in 2023.

Analysts appreciate the sentiment’s resonance. The Zacks consensus estimate for the fiscal year ending September 2023 has increased by 49 cents (8.9%) in the last 30 days. The estimate for 2024 is up 41 cents (6.7%).

At 17.6XP/E, the shares are trading just under a multiple of the S&P 500 and very close to their average value over the past year.

Price performance for one month

Zacks Investment Research
Image source: Zacks Investment Research

5 stock is set to double

Each was hand-picked by a Zacks expert as the #1 favorite stock for gains of +100% or more in 2021. Previous recommendations are up +143.0%, 175.9%, 498.3%, and +673.0%.

Most of the stocks in this report fly under Wall Street’s radar, providing a great opportunity to get in on the ground floor.

Today, check out these five potential on-home deals >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 of the best stocks for the next 30 days. Click to get this free report

Plexus Corp. (PLXS): Free stock analysis report

Jabil, Inc. (JBL): Free stock analysis report

Sanmina Corporation (SANM): Free stock analysis report

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The views and opinions expressed herein are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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