Markets & Finance

Consumer Electronics Keeps Its Charge


By Sam Stovall The S&P Consumer Electronics subindustry index has been a member of the S&P Industry Momentum portfolio since March, 2002. That reflects its strong showing over the past two years. The subindustry index has posted a 132.8% rise year-to-date through Dec. 5, vs. a 21.9% increase for the S&P 1500. In 2002, it climbed 31.9%, compared to a 22.5% decline for the S&P 1500. It's now the longest-lasting entry on this list.

However, investors should keep in mind that the Consumer Electronics subindex contains only one company: Harman International (HAR

; recent price, $69). Most of the world's largest consumer-electronic manufacturers, including Sony (SNE), Matsushita Electronics (MC), and Royal Philips Electronics (PHG), are based overseas and aren't included in this S&P index.

Since S&P had no analytical coverage of the index's only component until last month, it seemed a bit futile to highlight an industry index with no corresponding investment outlook. (Catalog Retailers, another entry in this week's table, faces a similar dilemma.) But as of Nov. 6, S&P analyst Amrit Tewary began covering Harman.

STANDARDS WILL HELP. Based on sales from manufacturers to dealers, the U.S. market for consumer electronics was expected to total $99.5 billion in 2003, up 3.5% from 2002's estimated level, according to projections from the Consumer Electronics Assn. (CEA). In terms of unit sales, recent growth areas include DVD players, digital TVs, and digital cameras.

Tewary expects consumer-electronics demand to be driven by technological innovation, especially for digital products and services that offer consumers convenient, affordable means of accessing information and communicating with other people (see BW Online, 12/9/03, "Consumer Electronics' Tough Transition"). Delivering music and video via the Internet should bring both opportunities and threats to consumer-electronics outfits, in his view.

Tewary believes that the extent to which technology standards are adopted and accepted will have a bearing on which products succeed. Also, he thinks some older entertainment technologies or appliances will likely fade in popularity as newer, more attractive alternatives emerge.

AUTO INFOTAINMENT. S&P is somewhat disappointed by the pace with which new digital video-on-demand programming (in formats other than prerecorded disks) has been rolled out to -- and paid for by -- consumers. But Tewary sees the prospect of increased buying of enhanced or expanded levels of programming as a potential long-term plus for manufacturers of home-entertainment appliances and components.

In addition, some of the large consumer-electronics makers have various other significant businesses. For example, Sony is a large distributor of movies and recorded music, and Philips has sizable semiconductor and medical businesses.

Harman, which produces audio products and electronic systems for consumer and professional markets, carries an S&P ranking of 4 STARS (accumulate). Due to significant demand for its high-end infotainment systems in the luxury-car market, Tewary expects Harman's automotive original equipment unit to drive the group's top-line growth, projected to be in the mid-teens, over the next few years. Philips, which is not included in the S&P subindustry index, is ranked 3 STARS (hold) by S&P analyst Thomas Graves.

Industry Momentum List Update

For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of Dec. 5, 2003.

Industry/Sector

Company

S&P STARS* Rank

Casinos & Gaming/Consumer Discretionary

Harrah's Entertainment (HET)

4 STARS

Catalog Retail/Consumer Discretionary

Insight Enterprises (NSIT)

Not Ranked

Computer & Electronics Retail/Consumer Discretionary

Best Buy (BBY)

4 STARS

Computer Storage & Peripherals/Info. Tech.

Storage Technology (STK)

4 STARS

Consumer Electronics/Consumer Discretionary

Harman International (HAR)

4 STARS

Diversified Metals & Mining/Materials

Phelps Dodge (PD)

3 STARS

Gold/Materials

Newmont Mining (NEM)

4 STARS

Homebuilding/Consumer Discretionary

D.R. Horton (DHI)

5 STARS

Internet Retail/Info. Tech.

eBay (EBAY)

3 STARS

Internet Software & Services/Info. Tech.

Yahoo! (YHOO)

3 STARS

Semiconductors/Info. Tech.

Intel (INTC)

5 STARS

* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell). Stovall is chief investment strategist for Standard & Poor's


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