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Solectron quarter on target, Flextronics lands Ericsson business

It's a good day for contract equipment manufacturers. Solectron (NYSE: SLR) reiterated its outlook for the second quarter and fiscal 2001 Friday and Flextronics (Nasdaq: FLEX) will take over manufacturing of Ericsson mobile phones.

Shares of Solectron closed yesterday's session off $1.15 to $39.5. Flextronics, which topped analyst estimates for its third quarter earlier this week, slipped $0.88 to $35.31 in pre-session trading on the Island ECN Electronic trading network.

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 to $1.25 a share.

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

Analyst Chris Whitmore was bullish on the progress of Solectron's integration assets from a recent deal with Nortel Network (NYSE: NT), 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.

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

Under the deal, Singapore-based Flextronics will begin production of Ericsson-designed mobile phone 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 investor 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 (NYSE: LU).

Lucent recently said it will sell two manufacturing facilities up for sale and use contract equipment vendors. While Barr believes Celestica (NYSE: CLS) is the frontrunner, both Flextronic and Solectron could be poised to take advantage of the opportunity.

Barr currently has Solectron's stock rated at a "buy" while Flextronic is at a "strong buy".