Zacks senior technology analyst Steve Biggs, CFA is keeping his Sell recommendation on shares of Solectron Corp. (SLR) today. We wanted to find out why, so we looked into his recently updated report on the company:
While Solectron's Lean manufacturing initiatives should help keep operating expenses under control, current operating margins are well below its peer group, a condition that is unlikely to change without revenue growth. Until Solectron is able to demonstrate revenue growth through the ramp of new projects, we believe the stock will continue to underperform the market. We therefore maintain a Sell recommendation on SLR shares with a six-month price target of $2.50.
SLR has considerable customer concentration risk as it derived 61.0% of its revenue in the second quarter ended February 2007 from its top 10 customers. Without long-term commitments from its customers, SLR and the rest of the industry suffered from rapidly falling orders and excess and obsolete inventory.
As a leader, the slowdown hit SLR particularly hard, which has recorded nearly $7.0 billion in losses over a five year period. Specific to SLR, we are concerned about the health of its end customers, such as Nortel (NTL), where it is losing business. While its exposure to Cisco (CSCO) is a positive, networking has been a volatile business as it experienced a 23.0% sequential revenue decline in the February quarter. Cisco's implementation of a new supply chain initiative had a negative revenue impact of $240 million.
Read the analyst report on SLR