To All
This is an excerpt from Individual Investor.
Coverage Initiated on AFLX with "Strong Buy"; Buyÿ(4/9)
On April 7, Peacock, Hislop, Staley & Given analyst, Joe Blankenship, initiated coverage of Adflex Solutions (NASDAQ: AFLX) with a "strong buy" rating.
Blankenship likes AFLX because of its improving gross margins and operating income. For the fourth quarter, ended December 1997, gross margins rose to 20.9%, compared with about 17% in previous year, due to lower costs at AFLX's Thailand facility. Operating margins rose to 6.8%, and are expected to increase to 9% in 1998 and to 10% in 1999, according to Blankenship. In addition, AFLX continues to diversify its customer base and is reducing its dependence on hard disk drive manufacturers. The analyst's near-term price target is $30, based on a multiple of 22 times his 1998 earnings estimate of $1.46 per share.
According to Blankenship, AFLX's long-term revenue growth rate is likely to exceed 20%, even though the hard disk drive market continues to find new direction and AFLX sales are likely to remain flat for the first two quarters of 1998. The analyst expects sales to reach $238 million in 1998 and $290 million in 1999, up from $213.8 million in 1997. One of the main drivers to the flex market growth is the semiconductor industry, an area that AFLX continues to focus on.
We believe that AFLX represents a compelling value, trading at a significant discount to its peers. AFLX currently trades at about 12 times the 1998 consensus estimate of $1.50 per share. For comparison, Parlex (Nasdaq: PRLX), which fabricates circuits -- but mostly for market segments that do not overlap with AFLX's focus -- trades at about 26 times estimated 1998 earnings of $0.72 per share. Smartflex Systems (Nasdaq: SFLX), which is an assembler of flexible circuits, trades at 17 times its 1998 estimate of $0.57 per share. Adflex shares are also inexpensive in relation to its long-term earnings growth rate of more than 30%. |
