Benchmark Hits the Mark Again

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Electronics manufacturing services companies have had a mostly rough few years. Even Jabil Circuits (NYSE: JBL), which had been the star of the bunch, recently disappointed investors with poor quarterly performance. Last Thursday, Benchmark Electronics (NYSE: BHE) reported results for its fiscal second quarter. I was originally interested in Benchmark because, unlike peers Flextronics (NYSE: FLEX), Solectron (NYSE: SLR), and Celestica (NYSE: CLS), it has been consistently profitable and able to grow over the last couple years. Let's take a look at the most recent quarter.

Revenue came in surprisingly strong at $749 million, which was 34% higher than the $561 million level a year ago. Analysts expected just $657 million, so this was a big surprise. Unfortunately the performance on the bottom line was not quite as strong. Net income was $27.5 million or $0.42 per share, which was a bit higher than the $0.38 analysts expected. Benchmark claimed that the strength was very broad-based across all business lines, including the medical, computer, industrial controls, test and instrumentation, and telecom sectors.

Here is where things get a little strange. Benchmark raised guidance for the fiscal year and is now expecting revenue of $2.76 billion to $2.85 billion. Guidance for the third quarter is for revenues of $710 million to $750 million. If you go to the trouble of doing the math, using revenues for the first two quarters, and add in $730 million (the midpoint) for Q3, you find that management expects revenues around $670 million for Q4. This would be a sequential drop in what is normally the strongest quarter of the year. Do they see a slowdown coming?

If a slowdown does materialize, profits can quickly turn to losses in the low-margin EMS sector. An additional risk is that a large percentage of Benchmark's revenue (about 30% during 2005) comes from struggling computer maker Sun Microsystems (Nasdaq: SUNW). I would like to have an opinion of what the future holds for Sun before I invested in Benchmark.

I have held shares of Solectron for a couple years and obviously have not been rewarded for my patience. I am attracted to the EMS sector because of the likelihood that the outsourcing trend will continue, but I have been considering switching teams. The top contenders appear to be Jabil and Benchmark, but more due diligence is needed before I decide whether either of these companies is worth owning.

For more wafer-thin links:

• Jabil Falls Off the Track
• Riding Technology to a Triple
• EMS Industry Woes

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Fool contributor Dan Bloom owns shares of Solectron and he promises to keep them at least long enough to adhere to the Motley Fool trading guidelines.