Solectron Feels for a Bottom
By Diane Hess
03/22/2002 14:26
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Solectron SLR remains stuck at the bottom of its 52-week range after turning in a rough quarter Thursday and predicting another one to come. The news itself hasn't appreciably lowered the stock, but at roughly 25 times forward pro forma earnings, some say shares of Solectron and its peers are still expensive.
"The stocks are pricing in a strong second-half recovery," said Keith Bachman, an analyst at ABN Amro, "which is a concern."
The contract manufacturer of electronic products lost $126 million, or 15 cents a share, in the second quarter, about what analysts expected following a warning earlier in the quarter. Revenue fell to $3 billion from $5.4 billion last year.
Solectron also gave third-quarter GAAP earnings guidance of 4 cents to 6 cents a share, pro forma guidance to break-even of a loss of 2 cents, and its sales guidance of $2.7 billion to $3.1 billion. All of the estimates were below consensus forecasts. The company cited continued softness in sales and higher interest expenses.
The stock fell 5 cents to $8.20 Friday.
Go East
Solectron, which is in the midst of an effort to restructure its manufacturing and move it out of high-cost countries and into places such as Asia and Eastern Europe, also disappointed analysts by saying that much of a trumpeted $4 billion business pipeline is likely to be pushed out toward the end of next year.
ABN Amro's Bachman cut his price target Friday to $6 to $7 from $8 to $9. "We continue to have a cautious view of the sector," Bachman said, "particularly because of weakness in the telecom industry, where some of these companies get as much as 30% to 50% of their revenue."
Bachman said Solectron, in particular, has to get its cost structure in line with its revenue base. "SG&A is where they have to do some work," he said. The company's efforts to lower expenses are reflected in the massive restructuring charges it has recorded: $175 million in the second quarter and possibly another of that size in the third.
Big Macro
On a macro level, analysts are split in their opinions of a recovery in the EMS sector. The bulls say the trend in outsourcing services is robust, even if the end markets are not. "The easiest way for OEMs original equipment manufacturers , such as Cisco CSCO and Lucent LU , to cut costs is to outsource their manufacturing," said Thomas Hopkins, an analyst at Bear Stearns.
Others see a cycle in which order push-outs continue to spiral. The difficulty a company like Solectron faces is evident by looking at its two biggest customers in its second quarter: Nortel NT , which made up 15.9% of its revenue, and Cisco, which made up 10.9%. While the weakness both have experienced explains their increasing reliance on contractors, the two are also veritable poster children for the "limited visibility" crowd, neither able to forecast demand with any degree of accuracy.
Solectron said its second-quarter business wins included Juniper Networks JNPR , Microsoft MSFT , and Delphi Automotive DPH .
The company also said it generated $1 billion in operating cash flow in the second quarter and reduced debt by $2.2 billion.
Shares of rival Flextronics FLEX were up 44 cents, or 2.42%, to $18.17, and Jabil Circuit's JBL stock was falling 29 cents, or 1.3%, to $22.21. |
