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Stock Analyst Update

Solectron Makes the Most Out of a Tough Quarter

Contract manufacturer's earnings are in line with expectations.

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Meeting earnings expectations wasn't easy for Solectron (SLR) in its fiscal third quarter. Despite warning earlier in the quarter that severe supply shortages could eat into expected sales growth, the company managed to deliver growth higher than its revised estimates of between $3.4 billion and $3.5 billion. With revenues coming in at almost $3.6 billion, Solectron posted sales growth of more than 50% over the same quarter last year, or on the lower end of the estimates the company originally gave when it met with analysts at its fiscal second quarter conference call. Earnings before one-time charges were also decent, coming in at $0.21 per share, in line with First Call's average estimate.

But although the topline growth and earnings were decent, there were some potential red-flags areas on Solectron's quarterly financial statements. Gross margins, which measure the percent of sales a company keeps after cost of goods sold, were only 8.4% during the period, more than a full percentage point below its gross margins in the prior quarter. By the nature of the contract-manufacturing industry Solectron operates in, margins are already razor thin. Industry peers tend to make up for the low margins by making efficient use of their assets, taking such measures as keeping modest levels of inventory. Solectron, however, has seen the average days of inventories it holds increase over the past few quarters, which is not a good sign in tandem with lower gross margins.

Jeremy Lopez does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.