Report understates Flextronics performance.
I missed the conference call guys, sorry about that. They only replayed it one time, instead of 24 hour replay.
Marks has posted his usual quarterly letter to shareholders on the Flextronics home page. From the report, and the letter, I conclude that the report is understating Flextronics performance. First, Marks indicates that foreign currency translation hit this quarter for 3 cents, while it added 2 cents last quarter, so this accounts for a 5 cent swing in the numbers. Add the 3 cents back in, and you get earnings power of 57 cents per share, add 4 cents of goodwill amortization back in, and you get earnings power of 61 cents per share. This is the number I would use to compare against other ECM stocks.
The margins this quarter were flat because of start-up costs in Mexico and Scotland, but also from more lower margin business. I still keep expecting to see some margin improvement. But so far the improvements experiencing by spreading SG&A and getting past the big facility start-up and ramp-up costs in China, Mexico, San Jose, and Europe last year has been offset by lower margin business and continued start-up costs of the new building in Mexico, SJ expansions, and Scotland. I'm still guessing we will see some margin improvement before the end of this fiscal year. They expected to breakeven in Mexico in the JunQ, and closing the money losing Wales facility and transferring that production to Scotland, should help margins. Also, Marks indicated that they have gotten their first non-Ericsson business in Sweden. As they build up their manufacturing campuses, and diversify their customer bases at their plants, I expect the margins to improve somewhat. It depends on a continuation of the outsourcing trend though, as a lot of capacity has been added to the ECM sector, and pricing could weaken without the strong outsourcing trend that we've seen. Good thing Flextronics was out in front of the huge capacity build we've seen in the last 18 months.
The revenues came in a bit lighter than the $390M I was expecting. I wonder if the fact that they closed the quarter on Friday, June 26, instead of Tuesday, June 30 could have impacted the revenues booked. Flextronics typically ships pretty continuously, so I'm guessing this could have nicked revenues any where from $9M to 15M, a good chunk of the shortfall from my estimate. But I wouldn't count on this. Also I noticed inventories grew faster than revenues; 22% versus 14%. But inventory turns stayed constant with the last quarter, so it could be that they just are seeing a higher material content in their mix. But I wonder if a lot of inventory was built right at the end of the quarter.
All in all, I think the report understates the earnings power.
Next quarter is not a good quarter for European operations, but Asia and the Americas should see some nice growth. We haven't seen any major impact yet from expanding the recently acquired Altatron and Conexao facilities, which is why these facilities were purchased. I wonder if the company gave any forward guidance about revenues for the next quarter in the conference call.
Based on all of this, I agree with 18acastra that FLEXF is trading cheap to stocks like SLR.
Paul |
