Flextronics Mid-Quarter Review..........Dec 3
EMS . . . Flextronics held its regularly scheduled mid-quarter review and again indicated that some Dec orders may go unmet and spill over into March Management reiterated guidance for Dec ($3.6-$3.9 billion and $0.13-$0.15) and March ($3-$3.3 billion and $0.07-$0.09) but made it clear that the low-end of the ranges are not likely. The December quarter estimates are currently $3.8B and $0.14 and our March quarter estimates are $3.175 billion and $0.08. FLEX’s top-ten customers are indicating 13% Quarter/Quarter growth in December and a 12% Quarter/Quarter decline in March, more robust than estimates which are for 8.5% Quarter/Quarter growth in December and a 16.5% Quarter/Quarter decline in March. Therefore, estimates are conservative, especially given HPQ (#1 customer) comment that Thanksgiving sell through was strong.
Consequently, March might only be down 10-15%, much less than the 21% decline a year ago. Vertical Components Update: FLEX’s vertical components business is the key to its operating leverage and potential earnings power. Its Multek PCB business is clearly improving as Dec will mark the first quarter in over 2 years that it has been profitable. Furthermore, lead times have stretched from 3 to 8 weeks which should result in price increases. Enclosures and plastics remain profitable. ODM Update: Higher than expected ODM volume should also boost March qtr revenue. FLEX is poised to reach profitability in its handset ODM business ahead of schedule. Originally were anticipating FLEX would reach ODM profitability in mid-2004, but, it appears now that it could occur in the March quarter and FLEX could breakeven as soon as this quarter.
Given the potential for revenue upside, and the improving PCB and ODM business in the December and March quarters, analysts are likely to see better margin recovery than expected. Analysts already estimate operating margin will be 2.8% for the December quarter, up 33% from 2.1% in Sept. FLEX is starting to build credibility towards a 4.5% op. margin on a recovery basis which would generate normalized earnings of $0.89, a P/E of only 17x. |
