In Electronics, Size Does Matter

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The eletronics market has been a popular investment area for decades. With its constantly changing marketplace and the continual advance of products, it's not one for the weak of heart. Take a read through this historical article from the 1960s and gain some perspective on this continually "shrinking" industry.

You should be extremely cautious about buying electronics stocks even after their recent sharply downward revision in market prices, for their price-earnings ratios are still generally high relative to the whole market, which is especially true of smaller, more speculative issues. This historical piece offers some great insight.

You must have heard a lot about how many of today's prominent electronics firms started out in a basement laboratory or garage workshop. A substantial portion of them have begun with no assets except for a few ideas or a few enthusiasts who are eager to get into the booming electronics business. That's how hundreds of small electronics firms came into existence, especially during the Korean War when it was comparatively easy to get into military electronics.

Many found themselves in trouble when the Pentagon started cutting back the number of weapons systems ordered and, worse still, the copies of each of such weapons systems.

In order to keep military spending within its budget, the Pentagon from time to time has to cut back marginal weapons systems. With the number of weapons systems shrinking, small electronics firms have to go after more dollars per sales. They have found it increasingly hard to live on making components alone, or even subsystems. They get to handle bigger and more sophisticated packages or even complete systems. This usually calls for more production facilities or simply a bigger company with more integrated facilities.

There are many who believe that to be adequately integrated, an electronics company nowadays should have a size capable of handling about $50 million in annual sales. This $50 million figure is, of course, subject to argument. While some settle for far less than that, others look for even higher figures.

According to Richard E. Krafve, president of the big-league, diversified Raytheon Company, by 1970 the inevitable shakeout in the industry will result in perhaps seven or eight large integrated companies producing a wide range of electronic products from components to systems. Mr. Krafve foresaw a new era of prosperity for Raytheon, leading to gross sales of more than $1 billion by 1970.

While the degree of integration may not be as drastic as seen by Mr. Krafve, the integration movement is likely to lead to the disappearance of many of the smaller specialized types of companies. The need for specialization will lessen as the more integrated companies close their product gaps, though there should be still room for well-managed specialist firms.

The hardship for smaller, narrower-line firms is expected to accelerate because of competition from quite another direction.

Formerly buyers of electronic gear, plane makers are now jumping into the business of manufacturing them. These customers-turned competitors are running head-on into independent electronics concerns. The whole struggle is taking on a cloak-and-dagger aspect, as the scramble for the electronics end of the defense business has been getting hotter every day.

Moreover, as it is still comparatively easy to get into the electronics business with a little capital hundreds of new concerns are incorporated every year, making the industry still more competitive.

The mortality rate for electronics concerns has been and will probably remain high. Market evaluation of the electronics issues could change overnight and sharply, and without much warning to stockholders. While it's not unusual for small, well-situated electronics stocks to double market valuations in a short time, it's also fairly common to see them going in the other direction just as abruptly. Watch closely, and see your portfolio grow.

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