A different analyst report on Plexus:
Highlights
--Upside Surprise Of $0.05 - PLXS reported Q2 sales/EPS of $97.7m/$0.28,
beating our estimate of $96.9m/$0.23, and Street consensus of $0.24. EPS
increased 22% in the quarter, and are up 19% for the first six months on a
5% increase in sales.
--Higher Gross Margin Drove The Increase In EPS - Gross margin was 12.1%
versus our estimate of 10.8%. This was the primary reason for the upside
surprise. A lower share count than our estimate (15.7m vs. our estimate of
16.1m) added a penny.
--Business Tone Is Firm - PLXS is benefiting from improved manufacturing
efficiencies and a sales mix shift toward higher technology products.
Despite pockets of softness in the EMS industry, business overall for PLXS
remains strong, due in part to its diversified base of over 100 customers.
--Raising EPS Estimates $0.05 - Based on Q2 results, we are raising our
FY98 and calendar year EPS estimates by $0.05. We are fine-tuning our Q4
revenue estimate by $2m and EPS by $0.01, but due to rounding our full-year
estimate increases by $0.05 to $1.18.
--Product Realization Strategy To Drive 20% Annual Growth - We believe
the Company's engineering- and technology-driven growth strategy (product
realization) will continue to win new business from significant customers,
supporting 20% annual growth over the next three to five years.
--Maintaining Strong Buy Rating - Our twelve-month price target of $27
is based on a multiple of 17.3x our FY99 EPS estimate of $1.57. PLXS shares
currently trade at 16.3x our CY98 EPS estimate of $1.30, a 15% discount to
our comparable company list, and a 34% discount to the S&P Industrials. We
believe PLXS shares deserve to trade at least in line with our peer group
mean of 19.3x current year estimates.
Second Quarter Highlights
PLXS reported Q2 EPS of $0.28 versus $0.23, a 22% increase over last year, and
$0.05 ahead of our estimate. Sales of $97.7 million were slightly higher than
our expectations, up 1% over the prior year. Higher gross margins (12.1% versus
10.8% last year), were the primary reason for the upside surprise to our EPS
estimate. We were modeling for flat gross margin comparisons. The improvement
was due to a combination of an improved sales mix and good cost management. We
are impressed with the gross margin performance given the flat sales comparison.
For the first half of FY98, sales have increased 5%, to $194 million, and EPS
have improved 19% ($0.51 vs. $0.43)
Sales mix by industry segment was: 33% computer related, 21% medical, 18%
industrial, 14% transportation, 12% telecom, and 2% other. In the first quarter,
computer related was somewhat higher in the mix, and industrial somewhat lower.
Going forward, we believe that the primary change in the mix will be to a
higher proportion of telecom sales and lower proportion of computer related
sales. (We note that PLXS computer related business is mostly high-end server
business and peripherals. The Company does not have any PC business.) PLXS's top
three customers in the quarter were IBM (12%), GE (#) (11%), and Unisys (10%).
The top ten customers represented 71% of total sales, compared to 68% a year
ago. We believe that the percentage of sales to the top ten customers will
remain in the 65% to 70% range in the future. Sales to new customers Ascend and
Ohmeda began to ramp in the quarter and will accelerate sequentially over the
next two quarters. New manufacturing customers include Hewlett Packard (#), and
Qualcomm.
PLXS generated $8 million of operating cash flow in the quarter and ended the
period with a very strong balance sheet. With net cash of $10 million and
shareholders' equity of $78.6 million (up 39%) the Company is well positioned
for further growth opportunities. Over the last twelve months, free cash flow
(operating cash flow less capex) was roughly $27.4 million ($1.74) per share.
During the quarter, PLXS purchased 80K shares of its common stock, and has
purchased 130K shares since December 1997.
Outlook
The Q2 performance and good tone in the business give us increased confidence in
our revised estimates. We are looking for YOY sales to increase by 8% in Q3 and
9.5% in Q4, driven by increasing business with new customers. It appears to us
that the business mix is improving (as evidenced by the gross margin), as higher
technology products (for customers like Ascend and Ohmeda), replace lower
margin business (from diminishing customers like IBM). We see this trend
continuing over the next several quarters.
Based on Q2 results, we are raising our FY98 and CY98 EPS estimates from $1.13
and $1.25 to $1.18 and $1.30. We shaved a penny from our Q4 EPS estimate (from
$0.36 to $0.35), and $2m from our revenue estimate (now $113m), to be more
conservative about timing of revenues. Due to rounding, however, our full-year
EPS improve by $0.05. We are leaving our FY99 EPS unchanged at $1.57, which is
33% YOY projected growth compared to our 13.5% projection for CY98.
Product Realization Strategy Continues To Drive Growth
PLXS continues to expand its engineering group and product design/engineering
capabilities. The Company hired 20 engineers during the quarter and we expect
engineering headcount to approach 200 in Q3. We continue to believe that PLXS's
"product realization" capabilities and focus on higher technology products are
key differentiators of PLXS from other electronic manufacturing services (EMS)
companies. Currently, product design/engineering services are about 5% of
overall revenues, but product design programs in turn drive about 20% of
manufacturing revenues.
What We Like About Plexus
1.Over the last five years, PLXS has experienced trend-line revenue
growth of 19%, operating income growth of 39%, and EPS growth of 39%,
without acquisitions.
2.The Company's product realization strategy and focus on higher
technology products give it a unique niche in the fast growing electronic
manufacturing services (EMS) industry. We believe these strategies will
continue to drive an improved sales mix.
3.Plexus has a diversified base of over 100 customers, with exposure
across several industry groups including computer, telecom, medical,
industrial, and transportation.
4.We believe the proprietary value of the Company's engineering and
product design capabilities is misunderstood, and is creating an investment
opportunity in PLXS shares.
Valuation
PLXS shares are currently trading below peer company and historic mean
valuations. Given the improving forward prospects for the Company and
accelerating earnings, we believe that PLXS shares are undervalued. At 16.3x
times our CY98 EPS estimate of $1.30, PLXS is trading at a 15% discount to peer
companies, and at roughly a 34% discount to the S&P Industrials. Our
twelve-month price target of $27 offers 27% potential upside, and is based on a
multiple of 17.2x our FY99 EPS estimate of $1.57. On an enterprise value to
trailing EBITDA basis, PLXS is trading at a reasonable 9.4x. Continued strong
financial performance and improved regard for the proprietary value of the
Company's product realization capabilities should lead to multiple expansion. We
believe that PLXS shares deserve to trade at least in line with our peer group
average (currently 19.3x CY98 estimates).
Risks
Long-Term Revenue Visibility Is Limited - As is typical of EMS providers, PLXS
has no long-term contracts with its customers. Delays or program cancellations
can occur, which negatively impact revenues. We believe that about 80%-85% of
PLXS revenues are driven by relationship-based customers.
Competition - The EMS industry is highly competitive, with several larger and
more powerful companies. While PLXS lacks the size and global manufacturing
capacity of some of its larger competitors, we believe that the Company has a
unique position with its advanced product design/engineering (product
realization) services and portfolio of successful products for numerous
customers.
Industry Capacity - Total global capacity relative to demand is difficult to
assess.
Component Pricing And Availability - Component costs are roughly 70%-75% of
total cost. Price swings or shortages of components can negatively impact
margins.
Business Description
Plexus Corp. is a leading provider of design, manufacturing, and test services
for electronic products. PLXS offers a full range of services, including
electronic product design/development, testing, and manufacturing. PLXS serves a
diverse group of over 100 customers, including major corporations such as GE,
IBM, Motorola (#), Unisys, Ascend Communications, Allied Signal, and Abbott
Labs. The Company has designed and manufactured a wide variety of electronic
products and assemblies which consist of circuit boards and various components
including microchips, integrated circuits, capacitors, resistors, and power
supplies. Plexus also offers complete box-build services for final assembly of
circuit boards, subsystems, and the housing into a final finished product.
Plexus serves a diverse group of end markets including computer,
telecommunication and data communication, medical, industrial, and
transportation. PLXS has no proprietary products of its own, but adds value with
a blend of contract manufacturing and product design/development services. The
Company can provide a complete product solution from concept through
manufacturing and service. By partnering with Plexus, a customer can access
state-of-the-art manufacturing technology while focusing its own capital and
resources on marketing, new product concepts, and alternative distribution
channels to improve its competitive position in fast moving markets. Plexus
markets its service to a diverse mix of industries that includes computers
(mostly mainframe and peripherals), telecommunications, medical, automotive,
transportation, and industrial.
Some or all of the following hedges may pertain: (#)Piper Jaffray Inc. makes a
market in the company's common stock and/or another company security. (o)A Piper
Jaffray Inc. officer, director, or other employee is a director and/or officer
of the company. (@)Within the past three years, Piper Jaffray Inc. was managing
underwriter of an offering of, or dealer manager of a tender offer for, the
company's securities or securities of an affiliate. (<)Piper Jaffray Inc. acted
as a financial advisor to this company. (&)Piper Jaffray Inc. has been retained
as a financial advisor to this company. (>)Not blue skied in all states.
Additional information is available upon request. This material is not for
redistribution in the United Kingdom. Piper Jaffray International, Inc., Member
of the Securities and Futures Authority, Ltd. |
