A Winning Mix at Plexus
By SANDRA WARD / Barrons Sept 1, 2012
[Remember Plexus? Here's a recent write-up. - A]
A broad and diversified customer base, rising sales and profits, and a talent for producing high-end designs give the circuit-board maker an electric outlook.
Early in its planning for Freestyle, its futuristic soda-vending machine, Coca-Cola (ticker: KO) turned to Plexus (PLXS) to engineer the electronic controls that let customers at Burger King, Five Guys, and other fast-food outlets customize drinks by mixing and matching about 125 brands.
Plexus, based in Neenah, Wis., designs and manufactures high-end printed circuit boards used in a broad and diversified number of sectors, including networking and communication, medical, aerospace, and defense, as well as industrial and commercial applications. Besides Coca-Cola, Juniper Networks (JNPR) and General Electric (GE) are two other high-profile clients that represent a sizeable portion of Plexus's revenue, which is expected to exceed $2 billion this year.
PLEXUS'S FORTUNES are not only tied to the economy's health, but also to demand for its clients' products. Juniper Networks, for instance, represented 16% of sales in the third quarter, and the networking and communication sector as a whole accounts for close to 40% of sales. It's a testament to Plexus's disciplined management and clean balance sheet that despite a tough 2011, a year rocked by global economic uncertainty and severely hurt by the earthquake in Japan and the floods in Thailand, Plexus has beaten earnings expectations for four straight quarters.
The company won 36 new contracts in its fiscal third quarter, ended in June, that are expected to add $200 million in yearly revenue once production for all of them is fully under way. The quarter marked the fourth straight in which the circuit-board maker's contract wins have exceeded its goals. Revenue rose 6% in the quarter to a record $609 million.
Now appears to be a good time to pick up shares in this premier electronics service manufacturer. At $29.86, Plexus changes hands well below the high of $38.50 it reached in mid-January. Though the stock is up 9.1% this year, more appreciation is likely. Plexus currently trades at 13 times the consensus profit estimate of $2.36 a share expected for this fiscal year, ending Sept. 12, and 11 times the $2.72 that is the Wall Street consensus for fiscal 2013; that's below their historical multiple of 14 times and also less than the company's expected 15% annual earnings growth rate.
"They run a very good business," says Charles Severson, portfolio manager of the Baird Midcap Fund, who owns a position in the stock and who would expect Plexus's earnings to increase at a 15% to 20% clip in a more robust economy. That kind of earnings growth, he says, should push the stock into the high $30s. "Relative to their growth rate and their peer group in the industry, I think the stock is undervalued," he declares.
Deutsche Bank analyst Sherri Scribner sees the stock hitting $37 in the next year, a gain of 24% from its current level. She bases her price target on a multiple of 13 times her higher-than-consensus estimate of $2.85 a share for fiscal 2013. Scribner expects the printed circuit-board makers to trade below their historical multiple of 14 times as long as conditions remain unpredictable for their clients, limiting the industry's ability to forecast product demand.
Indeed, Plexus has cautioned that its earnings in the fiscal fourth quarter will likely be flat with the third quarter's, as certain key sectors, including networking and communications, medical and, in particular, industrial and commercial, report softening demand amid challenging macroeconomic conditions. Some of its top industrial and commercial customers have been letting inventories run down in anticipation of weak demand in the fourth quarter, and 13 of its top 20 customers are projecting sequential declines in revenue. However, fourth-quarter earnings will actually be somewhat stronger from an operational standpoint, because third-quarter results benefited from currency-exchange gains.
FOR CERTAIN SECTORS, such as networking and communications, the fourth quarter will contrast with a strong third quarter in which year-over-year sales were up 13% sequentially. A bright spot in the fourth quarter is expected to be the aerospace and defense and homeland security segment, in which revenue should rise 20%, based on new contract wins.
The Bottom Line
Plexus shares could climb more than 20% over the next 12 months, as the company realizes revenue gains from new contracts, maintains good margins, and boosts profits.
Costs associated with new contracts are expected to pressure gross profits, though margins, at 9.7%, should still be up modestly from the third quarter's 9.5% as the company reins in marketing and administrative expenses.
Despite the difficult environment, the outlook for next year remains upbeat. In late July, Plexus President and Chief Executive Dean Foate, a 28-year veteran of the company, told investors that "we remain optimistic that we will experience stronger year-over-year growth in fiscal 2013."
That's an outlook that Plexus shareholders can toast at their local Burger King or Five Guys with a cup of Coke or 124 other soft-drink brands. |
