Glance at a 10-year chart to see the roller-coaster ride shareholders of Solectron (NYSE:SLR) have been on. At the end of 10 years, the stock is basically unchanged. But within those dates, the volatile stock has been anything but dead. The unlucky souls who bought on Oct. 24, 2000, at the all-time high of $52.63 are nursing a 93% loss. Then there are the folks who bought at the all-time low on Oct. 10, 2002, and now have a 267% gain. Now that's worth talking about.
But what counts is what the company is reporting now -- and it's not good.
After the market closed on Thursday for the Easter holiday, Solectron reported that its second-quarter sales declined 4.5% from the same quarter last year. Although the net loss fell from $90 million a year ago to $5 million this quarter, the company is still entering red ink on its ledger.
A component part to the stock's 13% decline, besides brokerage downgrades, is this missive from the press release: "We now expect that second-half revenues and earnings will not be higher than first-half results."
Solectron is in with a tough crowd, at least with regard to its buyers. Fifty-nine percent of its sales came from its top 10 customers in fiscal 2004 -- 13.2% of sales come from Cisco Systems (NASDAQ:CSCO) alone, and stalwart IBM (NYSE:IBM) is another key buyer. That means pricing power on the part of buyers -- not a good thing, since it can bring down margins.
And it has. Operating margins are near a measly 1% for Solectron. But the company has company: Competitors' margins aren't any better. In addition, Solectron's high-level pricing power is also impeded on the supply-side -- as some margin of its materials/input parts are tied to basic materials prices and in turn inflation, highly commoditized markets. The endgame here: Solectron's revenue stream and, in turn, earnings are exposed to the economy's cyclical elements and inflation.
Pundits seem to regard the weakening demand picture at Solectron as emblematic of industry conditions. Bear Stearns downgraded its outlook for the company and competitor Sanmina-SCI (NASDAQ:SANM) -- despite improved sales and profits in Sanmina's latest quarter, which ended Jan. 1, 2005.
The outlook for the remainder of the fiscal year may stop the stock from outperforming its peers for now. But Solectron does sport $2 billion in cash and a balance sheet that's a decent clip stronger than its peers'. Parlaying that into strong profitability will be a definite long shot, but those brave enough to hold on and wait might find their reward in years to come.
Fool contributor W.D. Crotty does not own shares in any of the companies mentioned but is known to be very passionate about investing! Click here to see The Motley Fool's disclosure policy.
