A Benchmark Electronics Company

07/25/2007 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

John Buckingham of the Prudent Speculator TechValue Report says Benchmark Electronics is a highly profitable, financially stable and very competitive contract electronics manufacturer.

Shares of Benchmark Electronics (NYSE: BHE) have continued on a rough and rugged byway to no-man’s land since [we last featured this company] in November 2005. Investors remain wary of the electronics manufacturing services (EMS) industry and the many challenges it continues to face: increased competition, rising raw-material costs, declining unit shipments, limited pricing power, and the resulting thin margins.

But Benchmark proved in the latest quarter that the firm can continue to turn in double-digit revenue growth. EMS providers, also known as contract manufacturers, continue to benefit from the shift of original equipment manufacturers (OEMs) away from device production to focusing more on technology and marketing. In addition, EMS companies offer OEMs the ability to produce locally in various parts of the world, reducing time to market and overall cost.

Benchmark provides its manufacturing services to numerous end markets that include computers and related products for business enterprises (52% of first-quarter revenue), telecommunications equipment (14%), industrial controls equipment (13%), medical devices (14%), and testing and instrumentation products (7%). The company’s operations include 4.3 million square feet of manufacturing space spread across 33 locations in North America, South America, Europe, and Asia.

Management has stressed customer diversification, a focus prompted by an ongoing reliance on computer systems maker Sun Microsystems (NASDAQ: SUNW). That reliance has become more limited of late, due to efforts of both partners. In 2003 more than 50% of Benchmark’s revenue was generated through Sun, while the vendor represented only 39% of 2006 sales. 2007 sales to Sun are predicted to drop to 25% of Benchmark’s revenue. While that may create some short-term pressures, we believe the longer-term effects, such as greater customer diversification and potentially higher margins, will prove positive for Benchmark.

Furthermore, Benchmark has a track record of winning new business. The firm sealed 11 new relationships with customers during the first quarter of 2007, the largest number since the second quarter of 2003. Over the past five quarters, BHE has announced 38 new program wins with annual revenue potential of $454 million.

Benchmark also completed the acquisition of Pemstar in January 2007, a deal which greatly improves the firm’s engineering and systems integration capabilities. Pemstar also seems to have added to Benchmark’s ability to score greater business with existing customers.

Benchmark attracts the value investor in us by its industry-leading revenue growth, relatively inexpensive valuation and superb balance sheet. Among the six major US-traded EMS providers (with $1 billion or more in trailing-12-months revenue), Benchmark continues to be one of the most profitable, and we think its continued focus on improving operational effectiveness will help turn its industry-leading revenue growth into an even more robust bottom line.

Benchmark’s balance sheet sports $3.39 per share in cash ($245 million) net of a relatively minor amount of long-term debt. Yet, despite the relatively more compelling financial metrics, Benchmark trades at only a slight premium to other large players in the group and remains our favorite pick in the EMS space. (It closed below $24 Tuesday—Editor.)

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