I agree with your post right down the line.
The only thing on the report that bothered me was that the margin before special charges, taxes, interest, and goodwill depreciation seems to have dropped from 5.6 to 5.2%. I guess this is natural given the inclusion of the new operations, and remaining start-up expenses of the new facilities. But this means they came in a bit short of my estimates; I expected over 50 cents. Of course if we add the 5 cents of goodwill amortization back in (paper expense required by the SEC), then comparable EPS to other ECM stocks is 53 cents.
The plan now is to grow by building out their existing sites, with exception of the SJ ECM company acquisition. This site is currently running one shift, and Flex will go to 3 shifts as soon as they can. One analyst on the conference call seemed concerned that the growth would be constrained by available capital. Flextronics replied that to grow 30% would take CapEx less than the $68-75M capex projected for FY98, and they have $73M cash. They expect to grow faster than 30% though, but have strong cashflow and a credit line, so they don't think they will be stopped by capital constraints. And of course, they keep an eye open for opportunistic acquisitions.
Since they are planning to grow faster than 30%, the improvement in margins may not be as large as when the growth slows to that level. For now the company advised analysts to stick with their existing models. Several analysts questioned why with the expected growth, they shouldn't raise their estimates. The company did state that MarQ revenues would not grow as fast since the DecQ is the biggest Q seasonally for Neutronics, and their Asian operations will be impacted by the Chinese New Year. Future Qs should show significant growth, but to be conservative, they prefer to stick with existing models. Eventually, I think we should see good margin improvement, as we get past initial startup and training costs at the new plants.
Given this, I agree we may not see significant news between here and April. But the growth already out there is significant, and between now and then, the future Qs growth will begin to be factored into the stock price. The stock will also be tied to the sector. Right now, it seems no one wants to pay more than 20 times run rate earnings in this sector, and that puts a cap of about 40 on the stock for now. I'm hoping as the fears of the Asian crisis dies down, the sector valuations will improve as investors look for strong top line growth candidates at reasonable prices. At that time we may get 20-25 times forward earnings, and that will give us a stock price in the 50-65 range six months out. Those of us who bought recently at 30-34 only paid 12-13 times forward earnings for one of the best growers in the sector.
There will be some acquisition news between now and April, and Marks likes to stick some tidbits in his news releases about other key events the company has experienced.
In short, I'm disappointed about the way the market reacted to what I thought was a fine report, but I remain a bull at this price. I hope to be able to exercise all my options in April.
Paul |
