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Valuation of the Electronics Manufacturing Industry

The electrical equipment manufacturing industry, covered by SIC Group 36, covers all companies engaged in manufacturing equipment, machinery, and supplies for generating, storing, transmitting, and utilizing electrical energy, with the exception of computer equipment. The industry includes power distribution equipment, communications equipment, semiconductors, radio and television receivers, lighting and wiring, electronic components, industrial electronics, and household appliances.
The electronics industry creates products used by a wide range of other industries. Electrical components are used in everything from televisions to cars to medical devices. The fortunes of the electronics sector are therefore tied to the rise and fall of manufacturers in a broad range of other industry segments.

Industry Overview
Currently, the electronics sector is on the rise. While sales and earnings remain low when considered on a historical basis, many companies in the sector are showing earnings growth. Industrial manufacturers that reduced their purchasing during the last recession are now running low on inventory, prompting new demand for components. Stronger demand and higher earnings have reflected positively in the electronics industry's stock prices, as investors have become more confident about the industry's potential.
A number of manufacturing sectors are outsourcing the development of their products. Electronics component manufacturers that support these industries should be in a good position to profit over the coming year. Industries in this category include consumer electronics, medical devices, defense, and aerospace. Product development in the telecommunications sector, however, has been considerably slower.
While earnings may be increasing for the industry in general, so is the cost of raw materials such as gold, copper, and plastics. With demand for these commodities high, their prices are not likely to decrease any time soon. While most industries pass such expenses on to the consumer, fierce competition in the electronics sector limits the ability to raise prices.

Overseas markets for electronics are expected to expand rapidly, especially in Asia. Electronics companies that sell in foreign markets have considerable growth potential. Foreign investment is not without risk, however. Many companies that expanded into the European market saw earnings decline as European countries hit economic difficulties.
Semiconductors
The semiconductor sector is a significant part of the electronic components industry. The sector supports a number of technology products, including image sensors for digital cameras and cell phones, power transistors and radio frequency transistors, computer microprocessors, and controllers for automotive and process control systems.
Sales in the semiconductor industry rose an estimated six to eight percent in 2005 and are expected to continue to rise in 2006. Corporate spending on information technology projects will continue to drive semiconductor sales. The consumer products sector is also a rapidly growing market, with circuits in demand for digital televisions, home computers, MP3 players, and particularly cellular phones, which continue to evolve into multiuse information and entertainment devices.