Part 2 or 4
IMPORTANT POINTS
--The uncertainty of the company's earnings over the next 2 quarters keeps us from rating the company a buy at this time.
--Despite our market perform rating, we believe AFLX over the next 2 years, could prove to be the star performing stock mentioned in this report.
--The company continues its efforts to diversify away from the hard disk drive segment and add new customers that are leaders in their respective industries.
--Management has effectively executed its growth strategy to become an integrated supplier of flexible circuits and assemblies, offering its customers a total solution for their needs. As a result, the company continues to attract new customers and gain a larger percentage of their customer's total outsourced opportunities.
--Management has been able to accomplish positioning AFLX for long-term growth and improved profitability by shifting production from Britain to Thailand, having the new facility approved by the company's largest customers and achieving its goal of volume production ahead of schedule, and with the desired financial results.
--That the flexible circuit industry growth prospects over the next 5 years should be double that of the printed circuit board industry and that AFLX should be able to gain market share as a result of its strong presence and service offering.
MARKETS NOT COOPERATING
AFLX's largest end market is disk drives and its important customer within the segment is Seagate. Despite a fourth quarter
that beat consensus estimates, $0.36/share versus $0.05/share, the problems within the disk drive market, negative news regarding
the build up of disk drive inventories and general confusion regarding any corporation conducting business in the Far Eastern
markets, caused the shares of AFLX to collapse. Futher complicating the situation, the company was in the midst of a stock offering
which was eventually canceled, as the reports on the economic crisis in Asia and weaker disk drive demand were breaking. We
believe the build up of inventory at the disk drive manufacturers has, for the most part, been worked off.
Separate from the stock market's reaction, the company's non-disk drive business increased 104% in 1997, increasing to 57% of total revenues versus 38% in 1996, following the acqusition of Xyratex and 49% in 1995.
We ourselves are guilty of what we hope is an overreaction from the market, we believe that it will be very difficult for the company to meet analyst's consensus of $1.52/share in 1998, something that the market has obviously discovered as estimates have remained relatively flat while the stock price has been cut in half.
Our lack of history with the company make us reluctant to be a hero at this point in time, but despite our market perform rating, we believe AFLX over the next 2 years, could prove to be the star performing stock mentioned in this report. |
