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Stock Analyst Update

Solectron A Safer Bet In Slowing Tech Market

Contract manufacturer is benefiting from massive outsourcing trend.

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What Happened?
Monday evening, Solectron (SLR) reported fiscal first-quarter revenues and earnings of $5.6 billion and $0.29 per share respectively, exceeding First Call estimates of $0.27 by 7%. Sales growth, however, was abnormally boosted by an extra week in the quarter; revenues would have amounted to $5.3 billion without the extra week, leading to sequential growth of 13% and year-over-year growth of 89%. Also notable is the fact that growth also got a big boost from acquisitions in fiscal 2000.

What It Means for Investors
In the face of slowing growth in various technology end markets, we are encouraged by the fact that Solectron’s growth continues to chug along at a solid pace. Like many other tech companies, the firm suffered from weak end-market demand in PC, cell-phone, and even telecom equipment. Solectron, however, was able to compensate for these trends thanks to strong demand for networking gear and the addition of new manufacturing assets acquired from its customers. On the negative side, Solectron continued to show weak margins, and inventory management was still not as efficient as it could be. Relief may be in sight, however, as component shortages began to ease significantly (which is consistent with the earnings warnings by several chipmakers) in the November-ending quarter. Once component supplies normalize, we would expect profitability to improve to more normal levels.

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