Get Smart : Analysts Like Outlook for Memory Module Maker
Smart Modular Technologies Inc. figured that when it built its first overseas factory, in East Kilbride, Scotland, last year it would hire some 50 workers to make computer memory modules.
Today, the plant employs 100 people, working three shifts, and they’re struggling to keep up with demand from local computer makers.
Smart Modular has carved out a place as a key supplier of its components to makers of computer and other high-tech gear. Its stock--in contrast to that of many hardware makers--has soared more than 300% in 12 months, and investors and analysts say they expect more of the same, as computer makers contract out more manufacturing to companies such as Smart Modular.
“Big manufacturers want to do less and less themselves, and outsource more and more,” said Eric Efron, co-manager of the USAA Aggressive Growth Fund. “Smart plays right into that.”
The fund recently sold its 45,000 Smart Modular shares to lock in a return of almost 100%, Efron said. Efron said he still likes the company and is waiting for a chance to buy if the shares drop.
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Based in Fremont, Smart Modular takes memory chips and turns them into modules that readily snap into personal computers, networking equipment, telecommunications switches or other high-tech boxes. Its customers include No. 1 PC maker Compaq Computer Corp. and the biggest computer-networking equipment maker, Cisco Systems Inc.
With strong demand for its modules, the company’s net income rose 59% to $9.5 million in the second quarter ended April 30. Sales climbed 38% to $143.7 million.
Cowen & Co. analyst Robert Stone said he thinks earnings are poised to rise more. He expects per-share profit to rise to $2.15 next year from an estimated $1.76 this year while sales increase 25% to $744 million in 1998 from $593 million this year.
“They are really on top of this market and really know their customers,” he said.
Smart Modular is gaining a bigger share of an expanding market, analysts and investors said. Much of the increase can be traced to personal computers that run programs such as Microsoft Corp.’s Windows 95 or Windows NT, which consume large amounts of memory.
The same is true of equipment such as routers, specialized computers that control the flow of information in networks. Routers need more memory than ever as they groan under the weight of exploding Internet traffic.
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The company is winning market share against rivals because it developed fast, cost-efficient techniques for building and delivering the modules, Stone said.
“We get orders at 8 a.m. and ship either the next day or the same day,” said Smart Modular Chief Financial Officer David Mullen.
Smart Modular was founded in 1988 by Chairman and Chief Executive Ajay Shah, Mukash Patel and Shah’s wife, Lata Krishna, with $110,000 of their own and family money. The two men were veterans of Korean chip maker Samsung while Krishna was a former Montgomery Securities stockbroker. Today, she’s the company’s vice president for business development.
Smart Modular said its new Scottish factory and its efficient manufacturing will allow it to expand its European sales rapidly.
So far, that seems to be right. European sales rose to 11% of sales in Smart Modular’s second quarter from 7% in the first. The company expects European sales to reach about 30% of the total, although Mullen wouldn’t say by when.
In a sign of its plans to gain business in Europe, Smart Modular said it will open a sales office in Germany.
There are risks, of course, including Smart Modular’s dependence on a few big customers. Last year, its three biggest customers--it declined to name them--accounted for 46% of sales.
There’s also plenty of competition from closely held Kingston Technology Inc. and Viking Technology Inc., and publicly traded Tanisys Technology Inc.
With backing from Japan-based technology conglomerate Softbank Corp., Kingston Technology in particular is aiming for Smart Modular’s best customers, the big PC makers.
The chip industry also is notorious for fierce competition and sudden, extreme price changes, said Brad Sasser, a fund manager at Insight Capital Research & Management.
“It’s a business which is always susceptible to new entrants and price pressures,” he said.
Still, he says he’s happily sitting on his 300,000 shares in Smart Modular--and the 33% gain since buying the stock in March.
