Incorrect, both data and finance/economics indicate otherwise:
You said company's with lower tax rates get lower P/E's:
As long as the tax rate is sustainably low, taking advantage of foreign tax incentives/holidays creates real value for shareholders. In Flextronics case, their tax rate is sustainably low for a significant period of time as the foreign tax holidays and other factors that create a low tax basis have a long period to run. Look at Safeskin (SFSK) a rubber glove company with a 44 P/E. For the fiscal year ended 12/31/97 they paid $5mm of taxes on $42mm of pre-tax income, or 12% taxes (tax holidays on plants located in Malaysia/Thailand that employ significant amounts of people), pretty similar to Flextronics. Lower tax-rate companies do not get lower P/E's.
I would also add that Flextronic's tax-base creates a significant and real competitive advantage that should allow them to win more business than competitors. Projects are bid on an after-tax rate of return basis. Given a significantly lower tax base for Flextronics versus its competitors, I would surmise that they can bid lower, win more business, and still earn the same rate of return. In reality, the industry is so good right now and there is so much growth avalaible, that they probably do not need to do that, so on an after-tax rate of return basis, they should be coming out ahead and earning better returns for shareholders. We have not seen this yet as the business has grown so quickly that a lot of expenses have been put in place ahead of revenues. I think as the business matures and growth normalizes, rates of return on assets will pick up and more value will be created for shareholders.
You said comapnies with political risk get lower P/E's:
While I agree that political risk is a real factor and should be taken into account when valueing a business, the only way to dissect this issue is to look at the data within the contract manufacturing industry on a relative basis:
For example, Jabil and Solectron have higher multiples than Flextronics. Both Jabil and Solectron have manufacturing assets globally including China, Mexico, Malaysia and Hungary, among others. Their political risk is really no different than Flextronics, yet they carry higher multiples.
My opinion. |
