Jabil, Solectron guidance seen hinging on demand

According to Reuters, for analysts tracking the low-margin and long-suffering contract manufacturing sector, the key question in two conference calls this week will be whether tentative signs of a recovery in demand for some high-tech products is starting to trickle down.Solectron Corp. (NYSE:SLR - News) and Jabil Circuit Inc. (NYSE:JBL - News) are expected to shed some light on demand for tech goods when they report quarterly results on Thursday.Investors are watching Solectron and Jabil not only because they are in their $100 billion-a-year industry's top tier, but also because their earnings may provide clues as to how rivals may guide financial performance when they start reporting December-ended quarters in late January."Everyone takes it as a given that OEMs (original equipment manufacturers) are going to outsource," said A.G. Edwards and Sons analyst Tony Boase. "What's more important is end-market demand."Flextronics International Ltd (NasdaqNM:FLEX - News) recently boosted hopes among industry observers that demand seemed to be improving a bit. The Singapore-based contract manufacturer, which as recently as October held to a somber view of weak markets, noted in November the mood among its customers had improved, perhaps pointing to solid holiday-season sales of tech goods.However, pinning down how demand will look beyond the holidays remains difficult, according to analysts awaiting guidance from Jabil and Solectron.SIGNS OF RECOVERY?While the market for contract manufacturers is showing a "reasonable amount of stability," it is too early to say if it will improve in 2003, said analyst Jeff Rosenberg of William Blair and Co.As for guidance from Jabil and Solectron, Deutsche Bank Securities analyst Chris Whitmore expects it will be "relatively guarded." Said Whitmore: "Visibility remains pretty spotty."Solectron has posted net losses for six straight quarters as demand for tech goods sagged, but in September said it saw some signs of stability with quarterly revenues leveling out in the $3 billion range.Jabil in September reported a smaller profit for its fiscal fourth quarter from a year earlier. The company forecast first-quarter revenue of $1.04 billion and earnings per share, excluding charges, of 14 cents to 16 cents.Deutsche Bank Securities last week issued a research note pointing to "weak underlying demand" for tech goods. Additionally, the note said falling prices for electronics goods could crimp the near-term outlook for Jabil and Solectron as brand-name manufacturers demand lower manufacturing rates.According to Boase, the outlook for contract manufacturers will depend to a great extent on whether the long-suffering and penny-pinching telecom industry boosts spending on equipment."Handsets could see some growth and networking in theory could grow, but we think both could be offset by lower telecom expenditures," Boase said. "The biggest question mark will be telecom equipment, which is 15 to 20 percent of contract manufacturers' revenues and is a high-margin business," he added. Meanwhile, demand for personal computers and peripherals, such as printers, may prove mixed, Boase said. Boase said he is skeptical that contract manufacturers will see much of a turnaround in early 2003."At this time last year people were saying the same thing," Boase said. "You have to take it with a grain of salt." Source: Reuters