Lets update Flextronics revenue/earning projections.
Yani, please read the thread and the private message I sent you. Your questions and revenue projection is way offbase (too low) if you've read this thread. There's only 600 some posts. Also, read the Chairman's letters and earnings releases on Flextronics company site:
flextronics.com
But since you've raised the issue, and I haven't posted in a while, I thought I'd outline my projections for Flextronics. First though, one of the reasons I haven't posted, is that the stock had gotten a bit ahead of other sector stocks (like Jabil, which just went through a 'fire sale'), and I didn't want to "push" the stock until this anomaly corrected somewhat (which it now has, the spread between the two has narrowed from 12-15 points to only 3-4 points). I own big positions in both stocks.
I am very positive on Flextronics for the rest of the year, because I believe the consensus earnings estimate is too low, and they have a substantial chance of beating it. I also like Flextronics long term, because they have one of the best long term strategies in the business, with their focus on regional design and manufacturing centers in important electronics design regions, and global low cost manufacturing campuses in China, Mexico, and Hungary. They also have an excellent customer base focused on telecom, networking, and small consumer products, instead of the PC industry.
In the last conference call (summarized in this post:
Message 4185693
they also mentioned a few forward looking statement:
1. They expect operating margins to be flat, although eventually as they work through the startup costs, margins may increase.
2. The China and Mexico new plants were still losing money in the MarQ (after just starting up), but will become profitable in the JunQ.
3. Revenue projections were $360M-$370M for the JunQ by most analysts, and they were comfortable with that.
4. They expect existing Conexao and Altatron business to not add or diminish bottom line results for the next year.
5. They didn't want analysts to raise their estimates for the FY99, started April 1. The consensus estimate is about $2.40 a share.
OK, lets see if we can make sense of all this.
First, what will revenues run in FY99?
The analysts had $360M for the JunQ before the recent acquisitions of Conexao and Altatron, which adds about $30M a Q to revenues. So I actually believe JunQ revenues could be $390M. If they add any revenue from adding a second shift at Altatron, a better estimate is $400M. The SepQ is slow in Europe, but China and Mexico should be really coming on strong then, as well as a full Q of revenues from new shift at Altatron in San Jose. Flextronics other San Jose operations there were running at capacity in the MarQ, and they bought Altatron to get capacity in SJ, so I expect them to use it. A second shift at Altatron, will add about $20-25M in revenues per Q. So I get about $420M for the SepQ. The DecQ is the blowout Q, with all regions going full blast. The European operations of Neutronics alone, usually sees a big jump in revenues in this Q, almost 30-35% of annual revenues. Since Neutronics was expected to do about $300M in 98 calendar year, then about $100M of this should come in the DecQ, versus $60-65M in previous quarters. Also new capacity should be coming on-line in Mexico, Hungary, and China. Finally the decQ is a big quarter for the former Ericsson plant at Karlskrona in Sweden. A reasonable estimate for the DecQ is about $485M. Finally the last Q of FY99 is the MarQ, and this should see a leveling/slight drop-off to about $465M, as gains in North America are offset by seasonal declines in Europe and Asia. I add all that up, and get about $1770M for FY99 revenues. (And I think this number is conservative, and the company could hit $1900M due to new capacity additions.) But lets use $1770M as a revenue projection to calculate EPS.
Next we need to look at operating margins. Over the last several Qs, the company has an operating margin (before taxes and interest) of 4.8% and they have predicted this margin will remain constant. I find this astonishing, because in these two quarters, the big new plants in Mexico and China were losing money, and starting in the JunQ, these plants will start contributing to the bottom line. Assuming each facility starts operating at operating margins just half the company's average, then this would add about $10M a year to the operating income. But let me just use 4.8% margin first and estimate the EPS.
On $1770M in sales, first we need to subtract out the $110M being added due to Altatron's and Conexao's existing sales, because management has said these existing sales won't add to earnings. Then taking the remaining $1660M with a margin of 4.8%, I get $80M in operating income. Less interest and taxes, I get about $57M in net after-tax income. Divided by 22M shares, I get $2.62 a share. The quarterly breakdown is also interesting, where I get:
MarQ 98 (actual) $0.53
JunQ 98 (forecst) $0.57
SepQ 98 (forecst) $0.61
DecQ 98 (forecst) $0.73
MarQ 99 (forecst) $0.71
Total 99FY $2.62
The consensus for the JunQ is 53 cents a share, so I'm thinking they could blow out the consensus estimate in the current Q. I only think they won't hit this number, if they lose a major program, or the margin shrinks due to some new expenses, or the tax rate jumps substantially. I don't expect any of those things though.
I could run the numbers again, with an expanding margin. Using the assumption that the new Mexico and Chinese plants contribute about $10M annually to the operating income, instead of the losses/breakeven they have been contributing, then going through the numbers the same way yields an EPS of $3.00 a share.
Bottom line is that I think there is a significant chance that Flextronics will blow the earnings out for the upcoming year. And we should get a clear signal in the June report; watch the top line revenue growth, and the operating margin. This is going to be another interesting report.
Paul |
