There is no substitute for knowledge.
I agree, you shouldn't invest in stocks, if you don't understand the financials.
We can strip out all the goodwill from the assets, and thus value the businesses that Flextronics spent something in the neighborhood of $160M to acquire in the last two years at only the value of property and equipment. Then if we hit the balance sheet with all the debt used to buy these businesses (about $118M), and the future payments necessary to finish these acquisitions(about $20M), and all the future lease payments on capital leases(about $16M), then sure enough, the net worth is negative. That is, assuming that they don't generate any positive cash flow before the final payments on the acquistions are due, and even insufficient cash flow to pay their lease payments.
In other words, if we throw everything, including the kitchen sink on this boat, it will sink.
OTOH, if we consider that these businesses are worth about what Flextronics paid for them, and value their basic business at about what other companies in this sector sell for, then the enterprise value of Flextronics businesses is about $780M. Now subtract out the total debt, and future payments on the acquisitions, you still get about $642M. This is about 50% higher than the current market cap. And I believe that some of these businesses are worth more than Flextronics paid for them.
Finally, if you believe the market will soon value this sector higher than the current valuation, then we could see even more appreciation before Flextronics is valued close to the same valuation as other companies in this sector.
I believe this latter point of view is what motivated the insiders to buy $10M worth of stock at about $24-25 in February. And I suspect they know more about these financials then either of us.
Paul |
