Benchmark Beats Expectations

Benchmark Electronics (BHE - Snapshot Report) recently reported second-quarter results that beat expectations. Excluding restructuring charges of $1.0 million in the quarter, pro forma EPS of $0.19 was $0.02 better than the consensus estimate of $0.16. Quarterly profit was down from the year-ago EPS of $0.33 mainly due to lower interest income which fell 75.4% as a result of lower interest rates.

Quarterly revenue of $481.8 million was down 29.4% from $682.4 million reported in the year-ago period. Revenue was slightly below Zacks Consensus Estimate of $484.0 million and the consensus estimate of $486.2 million. Revenue was in line with management’s guidance of $460.0 million to $520.0 million while non-GAAP EPS came in at the high end of its guided range of $0.13 to $0.21. Benchmark blamed lower demand for enterprise IT and economic slowdown for the revenue shortfall.

Bookings in the quarter continued to show that new outsourcing opportunities are available and growing. Although revenue diversification and new program wins have been strong, they have not been strong enough to offset the overall macro downturn.

During the quarter, each one of the company’s industrial sectors showed sequential growth apart from Computing, which was the weakest segment. On a sequential basis, Computing was down 18%, while Telecommunications was up 8%, Industrial control was up 2%, Medical was up 8.0% and Test and Instrumentation was up 143%.

Margins improved in the quarter due to a better product mix shift, new wins as well as continued operational efficiency and cost control.

Benchmark witnessed end-market demand, which was stabilizing in the quarter. As a result, it guided for third-quarter revenue of $470.0 – $520.0 million, in line with the Zacks Consensus Estimates of $501.0 million and market consensus of $492.7 million. EPS, excluding restructuring charges, are expected to be in the range of $0.17 to $0.22, matching consensus expectation of $0.17 and Zacks estimate of $0.21.

With the Computing segment fading faster than expected, Benchmark is expected to face declining revenue in the coming quarters

Over the long term, we expect stability to come by as a result of new wins and more profitable businesses. However, with vulnerability in the Computing sector, we believe challenges will remain in the coming quarters and discourage growth in non-traditional sectors, where we expect a growth of high-margin products. With this, Benchmark will continue to experience decelerating revenue growth in 2009 as it did in 2008.

Although Benchmark is expected to struggle for the next few quarters, the company’s profitability is still above its closest comparables Jabil Circuit (JBL - Analyst Report), Celestica (CLS - Snapshot Report) and Sanmina-SCI (SANM - Snapshot Report). We maintain our Hold rating on Benchmark shares.

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