To continue Tommi’s good reflection and to chew on the question posed by @Mauri, this analysis could be expanded to cover European countries more broadly. I chose one Swiss, one British, one French, and one German company (whose shares were just delisted from the stock exchange); all, however, are electronics contract manufacturers with a turnover of 200 million plus. Compared to the Nordic selection, the performance of all these has been anemic, to say the least.
Source: Refinitiv and the undersigned’s spreadsheet program
What if the markets are pricing high risk into Nordic contract manufacturers because the same business isn’t yielding results on the continent, and they don’t believe the northern dimension can indefinitely resist the industry dynamics? Globally, there aren’t many larger EMS companies with operating profit margins above 5%.
All of the companies have grown through acquisitions over the last five years, and organic growth in the near future (and past) is negative. However, all selected companies have also invested in new equipment (I included my personal favorite financial ratio in the table: operating cash flow divided by investments, as well as the ratio of operating cash flow to acquisitions). Every company has invested more in itself during the period than money has come in, so all the companies are also heavily indebted. Additionally, all except Cicor have also gone to the owners’ pockets to dig for additional funding.
In our Nordic flock, investments have been more moderate and yet growth has been better. I wonder why this is? Are our companies simply better managed? If we look at another of my favorite ratios, Sales-to-Capital (which in this case also includes working capital and acquisition prices), our European friends have all nonetheless generated more than one euro in sales for every new euro invested—with the aggressively growing KATEK reaching nearly two. For the Nordic peers, this figure would be nearly the same at 1.5 for all (except Scanfil, which is slightly higher due to fewer acquisitions during the review period). From this, one could conclude that there cannot be very large differences in sales prices to customers for similar services, which means the better profitability of Nordic companies likely stems from better cost management—but how could they all manage that across the board?
I don’t have any answers to give here, only more questions at most. In my opinion, comparing to contract manufacturers more broadly gives a much more pessimistic view of the industry than what we have been used to in our part of the world in recent years. If the industry as a whole is poor, and an outside investor doesn’t really have the opportunity to compare individual players’ customers with each other, it is relatively justified to price risk properly into the required rate of return. After all, this has already been realized in terms of valuation for many companies, and there are no dividends or buybacks to make up for it.