JBL Expensive in toppy EMS Group (something from Briefing !LOL)
Solectron (SLR) 5.69 -0.41: After the close Thursday, Solectron printed Q2 pro forma EPS of ($0.02) on revenue of $2.887B (+22.4% Y/Y) vs. Reuters Research consensus at ($0.02) on $2.753B. Pro forma results include $74MM in restructuring charges and impairment charges related to restructuring program announced a year ago; restructuring is completed, expect nominal charges going forward.
Results benefited from the ramp of 3G handsets for NEC and stronger than expected demand for set-top boxes in the consumer business. Revenue mix is more concentrated and performance more lumpy compared against Jabil Circuit (JBL 27.86 -0.10). The following table shows sector revenue as a percent of sales and Q/Q growth for SLR vs. JBL.Sector Solectron Jabil
% of Sales % Growth Q/Q % of Sales % Growth Q/Q
Automotive 2% (10%) 8% 6%
Computing and Storage 31% (10%) 14% 5%
Consumer 21% 38% 21% (34%)
Instrumentation & Medical n/a n/a 11% 14%
Networking 22% 12% 23% 29%
Peripherals n/a n/a 6% 10%
Semiconductor & Test 5% 25% n/a n/a
Telecom 18% 8% 12% 15%
% Growth Q/Q 7% (1.1%)
% Growth Y/Y 22% 30%
Gross margin increased 198 bps Y/Y to 4.5%. Gross margin was impacted by the strong consumer business which carries lower margins. Operating margin, excluding extraordinary items, improved Y/Y from a loss to 0.8%.
Guided for Q3 pro-forma EPS of ($0.02)-0.01 on revenue of $2.9-3.2B vs. consensus at $0.00 on $2.860B.
SLR shares are, based on our inverted EVA / DCF model, priced for sustained low teens revenue growth assuming steady Y/Y improvement to upper single digit operating margin and aggressive capital management. As with JBL, the implied growth rate is heavily dependent on capital intensity and rises materially assuming an operating margin that is more consistent with the company's historical operating performance (6-7%).
Growth expectations are in-line with forecast for industry growth and management's expectations for growing the business in the 10-15% range. Margins are recovering from trough levels. Expect incremental improvement Q/Q as plant utilization, at 65%, improves and management continues to take costs out of the business.
SLR shares are moderately priced on a relative value basis. The following table shows price multiples and Y/Y growth rates for SLR compared against industry comps.Company *P/SG Ratio **P/OPG Ratio P/S Y/Y Revenue Growth
TTM 2004E 2005E TTM 2004E 2005E
Solectron (SLR) 0.4 (2.3) 0.3 0.4 0.4 19.7% n/a 13.3%
Celestica (CLS) 0.6 (19.2) 0.5 0.5 0.5 (18.6%) 19.8% 12.5%
Flextronics (FLEX) 0.6 (23.3) 0.6 0.6 0.5 1.5% 7.0% 13.5%
Jabil Circuit (JBL) 0.7 41.1 1.1 0.9 0.9 36.1% 32.1% 5.8%
Electronic Instruments & Controls 0.8 (77.0) 1.0 5.0%
*P/SG Ratio: Trailing 12 month (Price / Sales) / Growth ratio as of March 12, 2004.
**P/OPG Ratio: Trailing 12 month (Price / Operating Income) / Growth ratio as of March 12, 2004.
Results reflect management progress in sizing operations to current revenue levels, renegotiating existing contracts / pricing terms, and improving asset utilization. Potential for long-term upside provided management continues to aggressively manage working capital, delivers on low teens growth and margin improvement. We would slowly build position over time.--Ping Yu, Briefing.com
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