When will the bleeding stop? The electronics-manufacturing industry is one of the most cyclical businesses in technology, and stockholders are among the poorest technology investors. Like airlines and chemicals, you don't buy and hold these companies, you trade them. Remember 1998 and 1999, when these companies had so much business they couldn't fill all the orders. This was because they didn't have enough factories and couldn't buy enough of the small parts that went into every cell phone, printer, notebook, and server.

Now, these companies are standing by, ready to design and manufacture, but there's little demand from their technology customers. The electronics-manufacturing business is expected to grow significantly as companies shed their businesses with low return on capital, such as design, manufacturing, and distribution.

Solectron (SLR -- NYSE), one of the largest contract manufacturers, says it represents just 1.8% of the entire electronics industry and should experience sizable growth as the trend toward outsourcing becomes established. Solectron's business isn't improving and there's no immediate expectation that it will. Revenue next quarter will range from an 8% decline to a 2% increase, the company says. It doesn't help that 55% of revenue is tied to the most depressed segments in technology: networking equipment, mobile communications, and telecom equipment. Nortel Networks comprises 13.3% of its revenue and Cisco Systems is responsible for another 10.8%. Neither of these companies is reporting brighter futures in 2002.

But instead of bemoaning its fate, Solectron set out to win new business and has succeeded with recent signings, including Alcatel, Apple, Handspring, Lucent Technologies, and Maytag. It also scored a big coup by landing deals with Japanese customers that for many years have strongly resisted outsourcing any product cycle design. One such recent win is NEC for servers, storage, and workstations. Preparing to leverage the economic comeback when it occurs, Solectron is looking for lower-cost manufacturing facilities in Asia and Eastern Europe, which should enhance operating margins over the long term.

Solectron has also bolstered its financial position by reducing working capital, as evidenced by an 18% decline in accounts receivable and a 35% drop in inventory. With the working capital proceeds, Solectron has lowered its debt-to-capital ratio from 50% a year ago to 30%. Its cash position now stands at $3.2 billion, up from $2.2 billion last year.

When demand does return--and it will--Solectron will be one of the largest beneficiaries. Cisco, Hewlett-Packard, IBM, and others will experience an upturn at some point, and they'll need assistance in the entire product life-cycle development: design, manufacturing, materials purchasing, prototyping, circuit-board assembly, assembly, distribution, testing, repair, and warranty.

The leverage on fixed assets at Solectron should allow a return to 8% to 9% gross margins and operating margins of 5% to 6%. Gross margin for the recently completed third quarter was 7% and operating margin was -1%, due to higher selling, general, and administrative expenses.

I believe revenue can return to the previous fiscal year's level of $18 billion in the fiscal year ending August 2004, and operating margins will reach 5%, slightly lower than previous years' peak levels of 6%. Of course, this assumes that Nortel and Cisco's business stops declining by 2004.

Under this scenario, earnings per share would be 65 cents to 70 cents. The stock trades at about $5.35, yielding about eight times projected 2004 earnings. This stock looks dead in the water, but it's interesting to note that despite the continued downdraft in the technology sector, Solectron's price hasn't dropped much since it issued its bleak earnings forecast on June 20.

Although it's still too early to invest, Solectron will begin to see renewed business prospects over the next two years, and the stock may be close to bottom at these levels.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com.