Doug,
I came across this on the Yahoo thread - DLJ analysis. I hope you still have money in AFLX since you were the one that got me interested in the company. Here it is and take care.
Kurt
messages.yahoo.com@m2.yahoo.com
April 24, 1998
Adflex Solutions (AFLX: $20.25)
Upgrading shares to Buy, increasing target price and raising 1998 EPS estimate
Range: Earnings Per Share 1998 vs 1997 %CHg
30.00-11.12 Old New P/E F1QA $0.30 vs 0.10 +200%
1999E $1.78 $ 11.4 F2QE 0.32 vs 0.21 +52%
1998E 1.40 1.45 14.0 F3QE 0.39 vs 0.29 +34%
1997A 0.97 20.9 F4QE 0.44 vs 0.36 +22%
Market Cap.: $180.69 mil 5-Yr. Growth Rate: 20%
Avg. Trading Vol. (000): 160 Book Value: $6.06
Rating: Buy Change: Up from Market Perf. 12-Mo. Target: $30.00
VIEWPOINT
We are upgrading the shares of Adflex from market performance to buy, raising our 12-month target price of $23.00 per share
to $30.00 per share, implying potential upside of 48% from current trading levels, and raising our 1998 EPS estimate of $1.40
per share to $1.45 per share. Based on our estimates, AFLX appeared to be a compelling value when we initiated coverage on March
4th with a market performance rating. The first quarter's results clearly exhibited two of the three items that we felt were
necessary to warrant a higher conviction in our fiscal 1998 and 1999 EPS estimates.
* Despite a weak environment, particularly in the HDD segment, Adflex reported results of $0.30 per share versus $0.10 per share a
year ago, slightly ahead of consensus estimates.
* Adflex continues to reduce its concentration away from the HDD market. Sales to the HDD market now represent 34% of total sales
versus 38% sequentially and 52% a year ago.
* The third item would be a material pick-up in the hard disk drive market. While it is too early to call the turn, demand with first-tier
customers appears to have stabilized, while volume with second-tier customers such as Samsung, IBM and Maxtor has increased
significantly.
What we believe is becoming clearer is that the purchase of the AFLX's shares can now be justified by the rapid growth of the
company's non HDD business, as we wait for the substantial increase in earnings growth that will occur when the HDD market
returns.
We have become more confident with our 1998 and 1999 estimates, as management has clearly shown its ability to persevere in a
difficult market, reporting its sixth consecutive better than expected quarter. At 14.0x and 11.4x our 1998 and 1999 EPS estimates, we
believe the valuation ignores the company's significant opportunities to gain share in a rapidly growing market, as a result of its
vertically integrated strategy of providing a total solution to its growing customer base.
AFLX is winning new customers and further penetrating the company's existing customer base by effectively executing its growth
strategy to become an integrated supplier of flexible circuits and assemblies, offering its customers a one stop shopping approach that
reduces their overall costs and improves time-to-market.
We believe the company continues to gain market share, and while the overall HDD market has been soft, the company has benefited
by being aligned with the right customers such as IBM and Maxtor, which continue to take share from the first tier suppliers.
Importantly, after speaking with a number of our component suppliers, we suspect that the HDD market has bottomed out an that
inventory has worked its way through the channel and expect to see improvement as the year progresses.
The company's strategy to cut costs by shifting production to low cost regions such as Thailand and Mexico is clearly showing strong
result, as gross margins have improved from 15.4% to 21.0% over the past five quarters, while operating expenses remain under
excellent control. Moreover, design activity for new products continues at a strong pace, which is an important leading indicator of
future business activity.
IMPORTANT POINTS
* Sales to the HDD market now represent 34% of total sales versus 38% sequentially and 52% a year ago.
* The company's efforts to diversify away from the hard disk drive segment and add new customers that are leaders in their respective
industries is clearly showing results.
* We believe AFLX's new account wins and further penetration of existing customers has helped to insulate the company during the
down-turn in the HDD market and has now reached the point that will allow the company to show strong revenue growth, if HDD
remains flat.
* 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
to Thailand and Mexico, while maintaining its highly efficient facility in Arizona.
* That the flexible circuit industry growth prospects over the next five 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.
SUMMARY
We are impressed with management's ability to improve its cost structure and its efforts to diversify away from the HDD
market, while growing earnings at strong double digit rates, despite the weak environment. The company continues to gain market
share as a result of offering a total turnkey solution to its customers and is extremely well positioned in a market that is
growing rapidly. We believe the string of better than expected performance proves that the company is executing its well defined
strategy. As a result, we are upgrading the shares to buy. Our 12-month price target of $30 per share, up 48% from current trading
levels, still assumes a multiple of 16.8x off our 1999 estimate for a company that we believe has the potential for 20% annual
growth. |
