The electronic manufacturing service industry, or EMS for short, could use some help these days from another EMS camp -- the emergency medical service, with its proven ability to resuscitate sickly individuals en route to the hospital.
Demonstrating that the industry remains on life support, last week Solectron (NYSE:SLR) reported full-year results and another round of restructuring initiatives to get its businesses growing again. Problem is, investors have heard this same story for several years now from many firms in the space. In Solectron's case, there's a reason its stock is languishing below $3.50 per share.
I'll let fellow Fool Matthew Crews walk you through the quarterly and year-end details, and fellow Fool Rich Smith give you an overview of pre-earnings expectations in our Foolish Forecast. In a nutshell, results were weak. But that didn't stop management from proclaiming that Solectron has experienced a "return to growth" for 2006 after sales for the quarter grew 7.4% sequentially. The company now expects sales of $2.6 billion-$2.8 billion for its first quarter of fiscal 2007 and "non-GAAP" earnings of $0.04 to $0.06 per share.
While we're on the subject of GAAP versus non-GAAP, EMS companies such as Solectron have complicated their earnings releases by offering adjustments to reported earnings to strip out restructuring charges, charges due to discontinued operations, and other impairment charges. But these charges have been so constant that they are really part of the way EMS firms operate. As such, I'm skeptical of the adjustments, especially considering that Solectron is adding back stock compensation expenses to get to its non-GAAP numbers. Most firms now include stock option expenses in their reported earnings figures. Overall, it's a bunch of gobbledygook, if you ask another fellow Fool.
Apparently the market is unconvinced that growth has actually returned; the stock fell about 5% the day of the earnings release, and it's been stuck at less than $4 a share for over a year now. The first-quarter guidance lagged analysts' projections, and they were also unhappy about a new round of restructuring charges, with more job cuts planned.
The EMS industry has been a tough place for investors to make money lately. Over the past year, you would have lost money investing in Solectron and Sanmina (NASDAQ:SANM), though Plexus (NASDAQ:PLXS), Flextronics (NASDAQ:FLEX), and Jabil (NYSE:JBL) have had positive returns. But only Jabil and Plexus are up over the past two years, and Jabil is the only one with a positive five-year stock chart.
More optimistic investors note that the industry is working to diversify out of servicing the technology industry, including computers, storage, networking equipment, and communications markets, which make up the bulk of Solectron's revenue. Automotive now makes up a couple of percent of the company's sales, while other firms have entered into the medical equipment field in an attempt to move toward growing markets with less competition. Time will tell if the moves bring sustainable growth and profitability; until then, expect more non-GAAP wheel spinning.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further.The Fool has an ironclad disclosure policy.
