| An SI Board Since August 1996 |
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SLR |
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Solectron Corporation (SLR) is a contract manufacturer providing manufacturing and process engineering services to the electronics industries. The company has grown rapidly over the last four years from about $400 million in sales in 1992 to almost $3 billion this year. It has been able to capitalize on the recent trend among technology companies towards outsourcing more of their manufacturing, particularly their equipment and circuit board assembly operations. This trend, which should continue for the foreseeable future, coupled with the rapid growth of many of Solectron’s customers, should ensure that the company can grow earnings by at least 25% over the intermediate term, making the stock a compelling value at current valuations ($34 last trade ..down from 50 5/8 high).
The company’s operations are well diversified across several blue chip customers such as Hewlett-Packard, Sun Microsystems, and Intel as well as across products ranging from networking and telecommunications equipment (CISCO, BAY, etc) to computers (Dell). Solectron manages to be a much more efficient manufacturer than its customers would be, due to its excellent statistical process and financial controls which enable it to monitor margins and profitability of each product line on an almost “real-time” basis. The company is also growing geographically, particularly in Asia, with the purpose of becoming more of a global supplier of manufacturing services to its customers.
The shares have been off lately because the company failed to meet the street's expectations for a big 3rd (fiscal aug) quarter earnings report. The reasons were short term in nature. Solectron was unable to fully integrate the financial results of the new TI Texas plant acquisition and Apple's volume disappeared. Both issues should be solved already. The shares were further weakened when HP, Solectron's largest customer (11% of sales) pre-announced slowing order flow to a below 20% rate. SCI Systems is Solectron's largest competitor and much larger supplier to HP. SCI announced earnings last Friday and the shares jumped. SCI, however, is less of a managed qualtiy growth story.
Solectron is hard to get a handle on because the only people familiar with their work is HP, IBM, DELL, SUN, CISCO, BAY etc. As a contract manufacturer, the company must sign confidentiality agreements so as not to disclose what products they actually make. Competing products are manufactured side by side, although with differing plans. The growth however is consistent, well above 20% and the margins are a solid consistent 5 to 6%. It's customers make up a diversified portfolio of the growth possibilties coming out of the sili-valley.
At these prices the shares trade at about 16 times August 1996's projected fiscal trailing earnings. I don't think that the street understands this company or its industry. This company is the best operator in the group (winner of the Malcom Baldrige award). Management has also done a great job of keeping the story a secret. At close to a $2B market cap and 25% to 30% growth you would think it would at least make the news some times. I just hope the story is as good as I think it is.
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