*All data are as of the close of Friday, January 16, 2015. Emphasis is on company fundamentals and financial data rather than commentary.
The Printed Circuit Boards industry is another of those root industries that supplies a multitude of branch industries, with its companies at the base of numerous production trees. As the branches flourish and bear fruit, all the nutrients that feed them have to pass through the trunk first. Hence, within this industry we will find companies whose products and services are in constant demand, especially in this rapidly advancing technological age.
Just what does the industry specialize in? In the simplest of descriptions:
"Printed circuit board companies engage in the design, development, and sale of - as the name suggests - printed circuit materials, along with composite materials for telecommunications, infrastructure, and computing purposes."
In a more expanded description, these companies also provide such services as the design and prototyping of new electronic devices, embedded software design, circuitry and assembly systems design, and stress and durability testing. They are integral players in the development of new consumer technology "gadgets" from mobile communications equipment to wearable devices, as well as non-consumer electronics used by the aerospace, automotive, energy, healthcare and industrial industries.
We can understand, then, how their being at the root of so many production trees would cause their stocks to perform so well, with two of the three largest U.S.-based companies in the industry beating both the broader market and technology sector benchmarks, as graphed below.
Since the economic recovery began in early 2009, where the broader market S&P 500 Index [black] has risen 195% and the SPDR Technology Sector ETF (NYSE: XLK) [blue] has risen 273%, Jabil Circuit Inc. (NYSE: JBL) [beige] and Plexus Corp. (NASDAQ: PLXS) [purple] have surpassed both benchmarks with gains of 550% and 275% respectively while the third largest Benchmark Electronics Inc. (NYSE: BHE) [orange] is trailing the overall market only slightly with gains of 185%.
On an annualized basis, where the S&P has averaged 33.43% and XLK has averaged 46.80%, Benchmark has averaged a decent 31.71%, Plexus has averaged a commendable 47.14% while Jabil has averaged an electrifying 94.29% per year!
Looking at future earnings growth, the Printed Circuit Boards industry as a whole is expected to outgrow the broader market very impressively going forward as tabled below, where green indicates outperformance while yellow denotes underperformance.
Over the next two quarters, the industry is seen growing its earnings at some 1.74 to 17.16 times the market's average growth rate, before slowing to a more sustainable but still enviable 2.13 to 4.48 times over the longer term.
Zooming in a little closer, our three highlighted stocks are expected to put in a split performance in earnings growth much as they have in stock performance, as tabled below.
Jabil is expected to outgrow all by far, beating the broader market by a phenomenal degree over the next two quarters at some 19.89 to 55.55 times its rate, before slowing to a more sustainable 1.34 to 2.31 times over the longer term.
Plexus is also seen outgrowing the broader market, though at a more modest 1.02 to 1.63 times its average growth rate.
Benchmark, for its part, is seen mounting a rather notable comeback. Though it is expected to struggle over the near term, under-growing its two competitors as well as the broader market, it is expected to gradually improve until finally outgrowing all - broader market and competitors alike - as averaged annually over the next five years.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Benchmark delivered the greatest trailing revenue growth year over year, Plexus delivered the greatest trailing earnings growth while Jabil delivered the least growth in both metrics - even earnings shrinkage along with Benchmark.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs, plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Benchmark operated with the widest profit margin, Plexus operated with the widest operating margins while Jabil contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Plexus' management team delivered the greatest returns on assets and equity while Jabil's team delivered the least in both, even losing some equity.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Benchmark provides common stockholders with the greatest diluted earnings per share gain as a percentage of its current share price while Jabil's DEPS over current stock price is the lowest.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value comes under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Jabil's stock is the cheapest relative to forward earnings and 5-year PEG, where Benchmark's is the cheapest relative to company book value. At the overpriced end of the scale, Jabil and Benchmark swap their standings in each ratio.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Jabil offers the highest percentage of earnings over current stock price for all time periods while Benchmark offers the lowest in all periods.
• Earnings Growth: For long-term investors, this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Jabil offers the greatest growth over the near term, where Benchmark offers it over the next five years. At the low end of the spectrum, Benchmark offers the least growth near term, where Plexus offers it longer term.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Plexus' stock offers the greatest upside potential and least downside risk while Benchmark's offers the least upside and greatest downside.
It must be noted, however, that Plexus' stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up is analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Plexus is best recommended with 3 strong buys and 2 buys representing a combined 50% of its 10 analysts, followed by Jabil and Benchmark in a tie - the tie breaker going to Jabil with 2 strong buy and 2 buy ratings representing one-third of its 12 analysts, as Benchmark receives 1 strong buy and 1 buy recommendations representing one-third of its 6 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above, plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Plexus with a surging lead, outperforming in 10 metrics and underperforming in 4 for a net score of +6, with Jabil far behind, outperforming in 13 metrics and underperforming in 14 for a net score of -1, leaving Benchmark short-circuited in last place, outperforming in 8 metrics and underperforming in 16 for a net score of -8.
Where the Printed Circuit Boards industry is expected to outperform the S&P broader market substantially this and next quarters, significantly this and next reporting years, and meaningfully beyond, the three largest U.S. companies in the space are expected to split perform in earnings growth - with Jabil outgrowing all near term, Benchmark climbing from under-growing all near term to outgrowing all longer term, and Plexus holding steady in between.
Yet after taking all company fundamentals into account, Plexus Corp. wires together the soundest circuit of financial figures, given its widest operating margins, highest returns on assets and equity, highest EBITDA over revenue, highest trailing earnings growth, best price targets, and most strong buy and buy analyst recommendations - decisively winning the Printed Circuit Boards industry competition.