Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Solectron -- Ignore unavailable to you. Want to Upgrade?

To: mact who wrote (340)	10/20/1999 6:28:00 PM
From: mact	Respond to of 493

S&P Focus Stock of the Week: Solectron Corp. NEW YORK, Oct. 18 (Standard & Poor's) - S&P is bullish on shares of Solectron Corp. (SLR) as an indirect way to play growth in the Internet. As the use of e-tailing continues to rise, OEMs are being forced to adopt a more efficient operating model in order to be able to compete effectively. They are increasingly turning to contract manufacturers to simplify their operating model, reduce costs and gain easy access to costly leading edge technology. As the largest company in the industry in terms of revenues, Solectron is best-positioned to benefit from this continuing trend. Solectron surged past SCI Systems this past year with revenue growth of 59% in fiscal 1999 (Aug.), to $8.4 billion. We expect Solectron's revenues to continue to accelerate, and we forecast 50% growth in each of fiscal 2000 and 2001. The company has targeted a revenue run rate of $20 billion by fiscal 2001, endorsing our revenue growth targets. Solectron's customers include some of the fastest growing companies in technology today, including Hewlett-Packard, Cisco Systems, Sun Microsystems and Nortel. In addition, the company has positioned itself in the fastest growing industries as well, with a large percentage of its business coming from networking, telecommunications and personal computers. As Solectron's industry-leading customers continue to grow, the company will grow as well. Another way Solectron will be able to continue to grow rapidly is the trend in the industry for contract manufacturers to acquire the manufacturing assets of OEMs. These types of deals are very attractive since they allow Solectron to increase capacity and add a new customer or product line while allowing the OEM to de-leverage its balance sheet and reduce its operating costs. The company completed a number of deals in fiscal 1999, including major purchases of plants from NCR and IBM. Solectron has a good track record of making these deals accretive in the first year of purchase, and the company is actively looking for other manufacturing assets to purchase. Any such deal could accelerate revenues beyond current forecasts and lead to upside earnings surprises. It is widely believed that telecom companies will soon begin to increase their participation in outsourcing, as they are increasingly feeling the need to make their operations more efficient in this highly competitive field. Solectron already gets about 15% of its revenues from telecommunications, participating in this industry's rapid growth and positioning itself well for any future deals. Any additional program wins or manufacturing purchases from these customers could fuel upside surprises. Our 50% revenue growth target for the next two years, coupled with stable gross and operating margins, leads us to forecast EPS at $1.65 in fiscal 2000 and $2.15 in fiscal 2001, representing 46% and 30% growth, respectively. The company will be able to maintain stable margins, since costs of new program ramps and new plant acquisitions are offset by Solectron's ability to wring costs out of the manufacturing process almost immediately upon acquiring a new customer or product. The company uses its manufacturing expertise to make these programs more efficient and purchases in huge bulk, getting much lower component costs than their OEM customer could. On September 27, Solectron announced that it was acquiring SMART Modular Technologies, a maker of memory modules and embedded computers with 1998 revenues of $715 million. We expect this deal to merge smoothly with Solectron's Force Computing subsidiary, positioning Solectron even more on the high complexity, high technology scale among existing and potential new OEM customers. Upon announcing the deal, Solectron guided analyst estimates higher, saying the SMART deal could be accretive by $0.09 in fiscal 2000. The company's current valuation only takes into account existing business and programs and does not consider the potential for numerous new deals from telecom customers and other companies that need to improve their efficiency due to the rapid rise of the Internet as a sales model. In addition, we expect investors to continue to reward Solectron for its remarkable earnings consistency; it has reported over 23 consecutive quarters of year-over-year EPS growth, meeting or exceeding expectations in each quarter over that time. Despite a current valuation of 45 times our fiscal 1999 EPS estimate and 35 times next year's estimate, we feel that there is room for P/E expansion as this dominant contract manufacturer continues to accelerate revenue and earnings growth and hit its targets quarter after quarter. Our price target of $90 gives the company a P/E of 45 times this year's EPS expectations, within its historical P/E range and near an average P/E for the overall industry. Long term, shareholders should continue to be rewarded for their participation in the dominant company in one of the fastest growing industries.