Friday, October 1, 2010

SMTC Corporation Showing Consistent Improvement, Strong 2Q Numbers and Order Backlog Suggest Positive Outlook for EMS Provider

SMTC Corporation Showing Consistent Improvement, Strong 2Q Numbers and Order Backlog Suggest Positive Outlook for EMS Provider

It’s been more than ten years since SMTC Corporation (NASDAQ: SMTX, TSE: SMX) completed its IPO and closed the day at $25.38 on volume exceeding two million. Within a month and a half shares would climb above the $30.00 mark but by February 2001 those shares were consistently below the $10 mark, eventually settling around the $1-$4 range where it’s been ever since. That rapid descent has made their recent climb all the sweeter for the recent investors who managed to get in low on the stock and have seen share prices rise. That ascension, backed by strong second quarter numbers, could be a positive sign of what’s to come for the global electronics manufacturer as they boast of a solid order backlog and continued demand from their current customers as they enter the third quarter.
The core business of SMTX is as a provider of end-to-end electronics manufacturing services (EMS) which includes PCBA production, systems integration and comprehensive testing services, enclosure fabrication, as well as product design, sustaining engineering and supply chain management services.
SMTX’s five-day moving average of $3.42 is above its 50-day average of $2.92 and its 200-day moving average of $2.43.
Much of that can be attributed to the company’s impressive second quarter figures in which they showed an 82% increase in revenue to $71.2 million in quarter over quarter and compared to their first quarter of 2010 revenue jumped by $9.8 million- a strong indicator of growth. Not only did SMTX’s revenue growth exceed that the 5.90% growth (yoy) of its industry but also well above its competitors as Jabil Circuit Inc (JBL) reported 32.10% growth, Flextronics International Ltd. (FLEX) reported 13.50% and Celestica Inc. (CLS) reported 13.10% growth.
The revenue growth was due in large part increased orders from its top customers compared to first quarter orders as well as the addition of five new customers in the early stage of ramping production. John Caldwell, President and CEO of SMTC Corporation attributed the company’s solid earnings performance to “the combination of higher revenue and the continuing effect of last year’s cost and capacity reduction initiatives to measurably increase margins and overall profitability.”
While SMTX shied away from specific guidance concerning the rest of the year Jane Todd, SVP Finance and Chief Financial Officer, did say “Through the later part of 2010 we expect to increase cash generation and lower debt levels through continued profitability and reduced working capital as supply chain issues abate and timing issues reverse.”
SMTC Corporation’s recent strategic relationship with FEI Company (NASDAQ: FEIC), has also provided some traction for the stock as the company will now “manufacture integrated control cabinets for FEI’s Titan(TM) Transmission Electron Microscopes leveraging the internal precision sheet metal fabrication, printed circuit board assembly and cable harness assembly capabilities of its Chihuahua, Mexico campus.”
The relationship with FEI, as well as a number of SMTC’s existing clients, could be of long standing benefit as the order backlog and demand has the ability to drive share prices for some time.
Of course there are some variables that leave SMTX vulnerable as the economic uncertainty that continues to hang has left many investors cautious, especially as it concerns a company who has collapsed once before. In addition, SMTX does not have any insight into their customers end markets or their inventory, leaving future orders up in the air to some degree. To a large degree SMTX’s future is based on the future success of their customers and in this economy that continues to be a difficult environment to predict.
Putting things into perspective, SMTC Corporation has now seen four consecutive quarters of strong revenue growth and has maintained solid relationships with their existing customers while continuing to attract new customers, making them an attractive company among penny stock investors. If things progress as forecasted share prices could continue to climb and SMTC could once again find themselves on solid ground.
SMTX Chart:
Technical Chart on SMTX
Technical Chart on SMTX
SMTX is a penny stock traded on the NASDAQ. Penny stocks are share in public companies that trade below $5 per share.

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