Foxconn is one of the biggest contract m…

Foxconn is one of the biggest contract manufacturers in China and it’s running into some troubles finding profitability despite making gadgets for the Apples, Nokias and other big smartphone/tablet vendors of the world.  But before you write off the app/tablet/smartphone revolution because of Foxconn’s bad news today, let’s drill down for some deeper analysis.  Here’s an informative question from a subscriber at http://tradingwithcody.com:

If anyone should be #winning even in this recession, shouldn’t it be the hardware production company behind so many of the devices that power the revolution?  Of the companies I’ve seen you mention, I know Foxconn makes devices for Apple, Nokia, Vizio, and Cisco…  If that’s the case it would seem now would be a really bad time for them to be posting loses given the huge production numbers coming out of Apple alone (iphone 4 – with new volume increases thanks to Verizon – and the ipad 2).

http://www.engadget.com/2011/03/31/foxconn-reports-218-million-full-year-net-loss-exceeding-analy/

Traded on SEHK and TWSE exchanges – which got me thinking, do you trade any app stocks which are foreign exchange only?  If Foxconn is getting killed and may have to increase their future contract bids to cover these transitional costs (and the bad publicity of the suicides) what other company might benefit and be the potential long-side?

Travis

As a general rule, I don’t buy many foreign stocks…it’s tough enough to make money in companies that follow SEC and GAAP guidelines, and I can count on one hand the number of long-term investment success stories in non-fully-developed economies. China and it’s economy and it’s regulations make America’s look a little less corrupt even after the I-can’t’-believe-we-haven’t-prosecuted-any-TBTF-banksters reality that we live in these days here.

The question above is a good one, and maybe the American versions of the Foxconn contract-manufacturing model will benefit tremendously. But I can tell the question comes from a bull…because other, more bearish, traders would worry that if Foxconn’s hurting then so must be its competitors. And it’s the latter logic there that is why one of my favorite stocks, Celestica, has been trading down nearly 20% from its recent highs. Celestica also puts together the devices for the Apples of the worlds (Celestica’s biggest customers include Softee and Blackberry too).

But the analysts who have done their homework and have been following Foxconn know that the company’s been struggling tremendously with trying to maintain profitability while needing to dramatically improve the workplace environment for the company’s tens of thousands of factory workers.  As the engadget article says (bold mine):

Foxconn puts the blame on higher consolidated income tax and increased competition, as well as “cost streamlining actions” — a reference to the ongoing relocation and expansion plans, which are also the outcome of the Chinese suicides — that took longer than expected and led to increased spending along with higher manufacturing overhead.

And let’s also not lose sight of the fact that despite Foxconn’s and China’s remarkable learning of technological and manufacturing savvy, Foxconn’s not exactly leading the way when it comes to the next gen smartphone models.  As the WSJ reports today:

The change in the company’s fortunes comes as demand for sophisticated mobile gadgets such as Apple Inc.’s iPhone has grown at the expense of the less advanced products Foxconn makes for customers such as Nokia Corp. andMotorola Inc. Analysts said Foxconn’s reliance on Nokia, which accounts for as much as half of its revenue and may soon start cutting orders, as well as the slow pace with which Foxconn has shifted production to lower-cost inner China could continue to hurt profitability this year.

I’m a buyer of Celestica at these levels, as I continue to build my personal portfolio athttp://tradingwithcody.com. The stock is one of the single cheapest tech stocks I can find, especially when you consider the Company’s growing its nearly $4 in cash per share every year. Analysts have been forced to move their estimates for this year and next higher after Celestica reported a stellar growth quarter and the stock has been staying very cheap despite moving higher because the stock price can hardly stay up with the forward estimate bumps. I’d look for this stock to get to $20 or more in the next couple years.