Solectron on target; Flextronics lands Ericsson

It's a good day for contract equipment manufacturers: Solectron reiterates its second-quarter and full-year outlook, and Flextronics takes over the manufacturing of Ericsson mobile phones.

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It's a good day for contract equipment manufacturers.

Solectron reiterated its outlook for the second quarter and fiscal 2001 Friday, and Flextronics will take over the manufacturing of Ericsson mobile phones.

Shares of Solectron started Friday's session off $1.10, or about 3 percent, to $38.40. Flextronics, which topped analyst estimates for its third quarter earlier this week, slipped 6 cents, or less than 1 percent, to $36.13 in early trading Friday.

Milipitas, Calif.-based Solectron said Friday that it is comfortable with its numbers for the second quarter and fiscal 2001.

The company reaffirmed that it expects second-quarter sales of $5.4 billion to $5.7 billion, with earnings of 29 cents to 39 cents per share, excluding charges. For fiscal 2001, sales are pegged at just over $23 billion with pro forma cash earnings of between $1.22 and $1.25.

The company was reiterated at "strong buy" at Deutsche Banc Alex Brown.

Analyst Chris Whitmore was bullish on the progress of Solectron's integration assets from a recent deal with Nortel Networks, one of the largest original electronic manufacturing (OEM) deals ever completed. Whitmore also highlighted the strong growth in the contract manufacturing sector, which will also be boosted by an easing component environment.

Favoring Flextronics
The current strength among contract manufacturers was echoed at Flextronics, which will be the beneficiary of Ericsson's decision to outsource its production of mobile handsets.

Under the deal, Singapore-based Flextronics will begin production of Ericsson-designed mobile phones in April. The contract also will include management of the supply chain on a global basis.

For Flextronics, the arrangement is expected to boost revenue "substantially" and contribute to the company's cash earnings per share over the year.

The deal was cheered at Robertson Stephens, where analyst J. Keith Dunne raised the stock from "buy" to "strong buy."

According to Dunne, the opportunity to manufacture Ericsson's products far outweighs investors' concerns about Flextronics' exposure to cell phones and PCs, especially if Ericsson were to take "the long-term view of outsourcing production without burdening the EMS industry with older, high-cost facilities that have contributed to (Ericsson's) current dilemma."

And there may be more outsourcing opportunities on the way. Patrick J. Barr at ING Barings opined about the outlook for contract manufacturing, given recent developments at struggling telecom company Lucent Technologies.

Lucent recently said it will sell two manufacturing facilities and use contract equipment vendors. Although Barr believes Celestica is the front-runner, both Flextronics and Solectron could be poised to take advantage of the opportunity.

Barr currently has Solectron's stock rated a "buy." Flextronics is rated a "strong buy."