Dunno why FLEXF is selling off.
Of course a lot of stocks in the sector have sold off somewhat in the last 3-4 days. So could be a sector issue. This sector just doesn't seem to be attracting a lot of institutional interest. The upcoming BARS conference next week may generate a bit of interest.
Throw out a few excursions one way or another, and this stock has been locked in a trading range of 38-47 since last fall. In the meantime, revenues, earnings, and EPS have kept on growing nicely. Analyst upward revisions in their EPS estimates for FY99 seems to be the key for further stock appreciation. Flextronics must be advising that the analysts hold back on increasing their EPS estimates. But with the consensus estimate still at $2.41, and the fact that they beat the last quarter consensus estimate, and their biggest quarter the DecQ, its hard to see that they won't beat this estimate.
I wonder if analysts expect the gross margin decline of 1.0% we saw in the last quarter to continue. The net margin was flat, due to the SG&A costs being spread over more revenues, but the gross margin decline might indicate a shift in the product mix toward more lower margin business. Some institutional investors who have been burned on the board makers (like Hadco), due to Asian competition and deteriorating pricing, may be concerned about pricing pressures in the assembly business as well. The lower gross margin may be concerning them, if they interpret it as a sign of pricing pressures in the sector. Given the large new outsourcing commitments being made by OEMs this year, I don't believe that the pricing has fallen off much; there is just too much new demand. But it may take some time, 6 to 12 months or so, to confirm that this is the case. We need to get past some of the start-up costs and acquisition related costs. Of course, the margins on the $100M to $700M blocks of core business (often box-build) that are being outsourced in this sector, are probably lower than the margins on some smaller more value added board assembly work. Seems that the margins in the sector may be starting to converge a bit as the high margin players add lower margin box-build and high volume work. Since Flextronics has always had fairly low gross margins compared to the sector, I'm guessing we won't see significant margin deterioration from here. But you know, as SCI has shown, if you get huge blocks of low margin business, you can still make nice "returns on value added". I agree with the treatise by Keith Dunne at BARS that the focus on margins in this sector is misplaced. He concluded that the return on value added for the lowest margin players was close to the returns for the highest margin players. See this link:
exchange2000.com
Another concern that might be worrying investors: Backing out the $25-30M in the last Q due to the Altatron and Conexao acquisitions, the company's revenues went from $331M in the MarQ to $376-30= $346M in the JunQ. This is a nice $15M, or about 4.5% sequential growth. But given the MarQ is their weakest Q of the year, its not as strong growth as some expected (like me). But as I explained in my previous post, I wonder if the June 26th close of the quarter (instead of June 30th last year), impacted the reported revenues. Having missed the conference call, I don't know. I suspect we will see decent revenue growth this quarter in the $10-15M range, and then big revenue growth in the DecQ. If this happens, this uncertainty will be removed.
I'm very comfortable holding FLEXF right here and expect if they continue the growth trend they're on, that we will see a much higher stock price by the end of FY99 next March.
Paul |
