Boring Portfolio Boring Sells SLR
March 18, 1997

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

Phone: 408-957-8500

Closing Price, March 17, 1997: $48 3/4
Trade: Sell 100 shares

After the closing bell, Solectron reported results for its second fiscal quarter ending Feb. 28. Earnings of $0.65 per share were in line with analysts' consensus as reported in First Call -- which means they were better than what some analysts had projected and not as good as what some others were expecting. That compared with EPS of $0.52 last year and $0.63 in Q1 of this fiscal year. Sales for the quarter totaled $859 million, up 31% from the comparable quarter a year ago.

My assessment of the earnings report and the follow-up conference call with analysts is that although the results were very good, Solectron is not ramping up its systems assembly business as rapidly as they had anticipated. The weak European market that we have heard so much about is impacting their business to some degree, as well. One project was pushed out and another was canceled during the quarter.

The current consensus estimate for Solectron's fiscal year ending in August is for EPS of $2.75, which would constitute a 27% gain over the previous year. The company indicated that the third quarter will benefit from a backlog that did not get shipped in Q2. Visibility for the fourth quarter is somewhat less clear, given the quick-turnaround nature of much of Solectron's business.

Solectron indicated that they would very likely be looking to expand their North American operations this year in a low-cost part of the continent, quite possibly Mexico. In addition, they would continue to invest in recently acquired or opened facilities elsewhere. Those investments make good sense, assuming the company succeeds in expanding its systems assembly business. In the near-term, though, cash-flow is expected to turn negative.

In light of current uncertainties, partly specific to the company but more generally for the entire industry, I've decided to pare back the Borefolio's exposure to electronics technology stocks, and therefore Solectron will be rotated out this week.

This decision is not an easy one, and it is by no means a reflection on the company. Solectron is the cream of the crop in its business, which is why I added it to the Boring Portfolio in the first place. But the entire sector is troubled right now, and some trimming of exposure seems prudent. Should the situation improve down the road, I'd be delighted to see Solectron back in the Borefolio again.