Here's the trouble with turnaround candidates. Like political candidates, they can hang around forever -- full of potential but lacking that spark, that oomph, that turns a potential winner into a real winner. It is with that in mind that I continue my guarded optimism on outsourced-electronics manufacturer Solectron (NYSE:SLR).
For the company's fiscal fourth quarter, revenue fell 21% on a year-over-year basis and approximately 8% sequentially. That result was on the low end of the company's guidance from last quarter and about 4% shy of the average estimate. Adjusting operating income for restructuring and impairment charges shows that this quarter's performance was less than half that of the year ago period, though the company did report a small net profit.
On a slightly more positive note, the balance sheet remains in good shape. Ongoing improvements in working capital management have led to some pretty substantial cash flow improvements, and the company generated nearly $800 million in free cash flow for the fiscal year. On the other hand, most of that amount came from improvements in inventory and accounts receivable instead of from net income growth. Consequently, while cash flow is good, the picture is not quite as rosy as the numbers immediately suggest.
The bottom line for Solectron is that it either needs to hope for a recovery in telecommunications capital spending or find new ways to drive growth. Adding Lucent (NYSE:LU) as a customer will help offset lost business from Nortel (NYSE:NT), but that's not really getting the company ahead of the game. With a fair bit of surplus capacity left in the industry, the company might need to make some more dramatic moves. Fortunately, it has more than $1 billion in cash, net of debt, to help.
All told, I think Solectron is a little better off than most of Wall Street wants to give it credit for, even though I think the loss of its CFO to Intuit will hurt. Solectron already has relationships with quality customers such as Cisco (NASDAQ:CSCO), Sony (NYSE:SNE), and Motorola (NYSE:MOT), and if management can figure out some way to reduce its reliance on telecom capital expenditures, this could still be a good turnaround story. I'll still be following Solectron, but in the meantime, if I had to make a choice, I'd probably rather own Nam Tai (NYSE:NTE) -- a smaller, but much faster-growing, company in the electronics-assembly space.
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Intuit is a Motley Fool Inside Value recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
