As their counterparts in nearly every other segment of the supply chain posted losses, electronics distributors' stocks continued their slow and steady climb last week, finishing slightly ahead of the prior week, but substantially higher than they were just two months ago.
The distribution segment of the EBN/ Thomas Weisel Supply-Chain Stock Index finished at 766.81 for the week ended May 26, a 4.28% increase from the previous week, but 56.7% higher than its level for the week ended March 24.
Despite the sharp increase, however, analysts noted that the stocks had been extremely undervalued. "A few weeks ago, most of these companies were selling at book value, which, for an electronics distributor, is basically liquidation value because most of their assets are in their inventories," said Mark Hassenberg, an analyst at Donaldson, Lufkin & Jenrette Securities Corp., New York.
"The stocks were just ridiculously cheap," Hassenberg added. "They bounced off the bottom, and are now just sitting there waiting to see if we do have a recovery in the second half of this year."
Continuing to grapple with the overcapacity and low average selling prices that have lingered in spite of the improving conditions in the Asian economies, distributors have been struggling to reduce costs and improve margins. As a result, many investors had been leery of the sector, according to Hassenberg.
Now, as the build-to-order business model continues to gain prominence among OEMs and distributors increasingly step up their efforts both as parts suppliers and providers of logistics services, some investors appear to be taking a more bullish view, Hassenberg said.
"More and more, I think the distribution industry is going to be able to take up some of those logistics concerns of their customers, gain market share, and do well," he said. "The question is: At what time do we start seeing demand improve substantially enough to be able to offset the supply and move things up?"
Also helping to lift distributors' stocks recently has been a broader move by investors into industrial stocks, Hassenberg noted.
"While they are electronics distributors, they have more of an industrial mix to them than a semiconductor company would have," he said. "So I think it's the value players just believing that these things should sell above book. It's certainly not the growth and momentum players yet, but hopefully they'll be here some time over the next year."