Boring Portfolio Boring Buys SLR
October 15, 1996

Solectron Corp. (NYSE: SLR)
777 Gibraltar Dr.
Milpitas, CA 95035

Phone: 408-957-8500
http://www.oakridge.com/Solectron

Trade: Buying 100 shares SOLECTRON (NYSE: SLR)
Closing Price, October 14, 1996: $52 3/4

THE COMPANY

Solectron is a global supplier of pre-manufacturing, manufacturing, and post-manufacturing services to makers of computers and other electronics products. Although its specialty is assembling complex printed circuit boards and subsystems, Solectron can handle virtually any job: from product design and prototype development, to sub-system and system assembly and testing, to product upgrade and repair.

Solectron's customers include all the biggies: IBM, Hewlett-Packard, Cisco, Apple, Sun Micro, Silicon Graphics, Bay Networks, Applied Materials, and so on. They come to Solectron because they've learned that it can execute many highly specialized manufacturing tasks more efficiently, and with higher quality, they can themselves.

The company continues to benefit from the trend toward outsourcing of many functions that computer and electronics companies used to perform in-house. Because it focuses on manufacturing, Solectron is consistently on the leading edge of manufacturing process innovations, something that would be more difficult for its contract customers to do.

Solectron combines computer-aided design, manufacturing, and testing with just-in-time manufacturing, total quality control, statistical process control and continuous flow manufacturing. At Solectron these are more than buzz-words; the company is a model of how to translate these concepts into reality successfully and profitably.

Solectron's obsession with quality and customer service is legendary. The company has received more than 95 quality and service awards, including the prestigious Malcolm Baldrige Award (in 1991). Except for its most-recently acquired facilities, all Solectron operations are ISO-9002 certified.

Solectron customers are surveyed regularly and asked to grade the company on four factors: quality, delivery, service, and communication. The results are tabulated for each division within the company. Any division receiving a grade of less than B- on any factor must develop a plan for corrective action, present it to senior management for review and implement it.

Solectron is listed among Computerworld's "Premier 100 Companies," Financial World's "Best 100 Growth Companies," and Industry Week's "World's 100 Best-Managed Companies." It also ranked #3 on Individual Investor magazine's 1995 list of "Most Shareholder-Friendly Companies." The company is an industrial partner to UC Berkeley's Consortium on Green Manufacturing and Design, as well.

Solectron has over 2.1 million square feet of manufacturing capacity at its manufacturing locations throughout the world: Milpitas, Calif.; Charlotte, NC; Austin, Texas; Everett, Wash.; Penang, Malaysia; Bordeaux, France; Boeblingen, Germany, and Dunfermline, Scotland. The company also has program offices in Tokyo and Singapore. Solectron provides quick-turn prototype assembly services at three additional California locations. Foreign sales account for approximately 38% of the company's total sales.

The company's Web site (listed above) is chock-full of information -- highly recommended.

HISTORY

Solectron was founded in 1977 by former Atari employee Roy Kusumoto. His idea was to establish a small assembly job shop to handle some of the overload from Silicon Valley's electronics industry during peak periods. He also hoped eventually to experiment with solar power technology -- hence the company's name.

After failing to turn a profit in his first two years, Kusumoto hired Winston Chen, a native of Taiwan with a PhD in applied physics and applied mechanics, to run the business. Chen's vision was to blend the best aspects of Japanese management methods with American entrepreneurship and innovation. He became CEO in 1984.

Former Vermont Micro Systems head Charles Dickinson joined Solectron in 1984 and served as the company's chairman of the board from 1986 to 1990. Dickinson holds an MBA and a BS in electrical engineering.

In 1988, Kusumoto left and Koichi Nishimura joined Solectron as Chief Operating Officer. Nishimura, who holds a doctorate in engineering and materials science from Stanford, was an IBM veteran with experience in a variety of electronics technologies. He became president in 1990, co-CEO a year later, and CEO in 1992.

Intent on improving Solectron's performance, Chen and Nishimura adopted the Malcolm Baldrige National Quality Award guidelines in 1989. The company went public the following year, raising a tiny stake of $7 million with stock that sold for $1.50 per share. In 1991, Solectron won the Baldrige prize.

Solectron has grown its operations by purchasing facilities from several of its customers. In 1992 it bought plants in Charlotte, NC, and Bordeaux, France, from IBM for around $59 million. In 1993 it bought a printed circuit board assembly plant in Everett, Wash., from H-P and a facility in Scotland from Philips. It also increased production space at its Malaysian plant.

Dickinson again became chairman in 1994 when Chen retired to head the Paramitas Foundation, a charity he established.

In 1995 Solectron purchased H-P's printed-circuit assembly plant in Boeblingen, Germany, and expanded the Scottish factory. In 1996 it acquired Fine Pitch Technology, a California-based provider of prototype services, and Texas Instruments's custom manufacturing services in Texas and Malaysia.

Acquisitions increased the long-term debt/equity ratio to 56% at the end of FY96 (see below). Already in FY97, Solectron has announced that it will acquire Force Computers Inc., another manufacturer of products for the electronics industry, for about $187.5 million.

On Sept. 16, 1996, Koichi Nishimura became chairman in addition to his duties as president and CEO, when Dickinson retired. Dickinson continues as a board member.

THE STOCK

According to the Wall Street Journal, 227 institutions collectively own 82% of SLR shares. The company's most recent (1995) proxy statement lists Fidelity, with 10.7% of outstanding shares, as the largest institutional shareholder. Solectron officers and directors own approximately 4%, although some have recently filed to sell a bit of their holdings.

According to First Call, 11 analysts follow SLR. They forecast the company to make EPS of $2.76 in FY97, which would constitute a 27% gain over FY96's $2.17. Current estimates for FY98 are in the $3.30 to $3.55 range (mean = $3.45).

SLR shares first crossed the $50 mark in February 1996. The stock took a severe hit in June and July along with other technology stocks and bottomed at a 52-week low of $29 on July 16. From there it recovered gradually and then more dramatically following the report of FY96 earnings in mid-September.

At its current price of approximately $52 (a record high), SLR is trading at a bit less than 19-times projected FY97 EPS and approximately 1-times FY96 revenues. Analysts expect EPS to grow at an annual rate of 20 to 30 percent over the next five years. The stock is therefore still a good buy, in my judgment, despite the recent run-up in price. If the company can manage to meet or exceed expectations, SLR shares could close in on $70 by late next summer ($2.76 x 25).

Analysts' current consensus rating for SLR is 2.0, a "buy." Investor's Business Daily scores the stock 91 on EPS, 89 on Relative Strength, "A" on Accumulation/Distribution, and "A" on Group Strength. Average daily volume is around 175,000 shares. The stock's beta is a frisky 1.51.

--Greg Markus (MF Boring)