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Technology Stocks : Flextronics International (FLEX) -- Ignore unavailable to you. Want to Upgrade?

To: patroller who wrote (806)	9/22/1998 12:51:00 PM
From: kolo55	Read Replies (3) \| Respond to of 1422

Some of my interpretations of recent FLEXF comments. Its pretty clear that management is mystified why the street is tanking the stock. I believe its for several of the reasons they addressed, plus some I addressed. First is the question of who the large seller was. This seller(s) appeared right around the 30 level on the day after(Sep 1) the big 500 Dow drop (Aug 31). In fact, the volume on Sep 1st was much higher than on Aug 31st, as an initial rally to 30 after the 7 point decline on Monday was sold into in a big way. For all we know the seller(s) were pounding the stock during the 7 point decline as well. I have come to the conclusion that this was probably not an insider seller, and not one of the long term holders. I suspect it could be a combination of short sellers selling into a perceived "dead cat" bounce and international hedge funds who were forced sellers due to the market collapses in international markets. Remember that FLEXF qualifies as an international stock, and it is possible that international hedge funds held FLEXF. In fact compared to market illiquidity in Asia and Eastern Europe, FLEXF is a fairly liquid holding, and may have been the best bet for these funds to raise cash in a hurry. This would explain the heavy volume in the sell-off, and why the sellers haven't appeared in force since then. I don't think we will see a resumption of the big selling pressure we saw in the first week of September, and when this becomes apparent over time, its a huge positive for the stock. Next reason: There are several unknowns about Flextronics business over the next several quarters. The Street knows about the downturn in the board makers, and know the Astron subsidiary makes miniature gold plated boards. Now management has admitted that the Astron unit is losing money at the moment. Also the Street knows about the layoffs in San Jose, and worries about slack capacity in San Jose. These might give some managers some bones to pick. But look at the San Jose news in context. Flextronics bought Altatron to get additional capacity in San Jose, and Marks said that Flextronics now has the 2nd largest assembly capacity in the Silicon Valley (behind Solectron, and I don't think he is counting Sanmina's backplane/backpanel biz). The slack capacity seemed to show up in late July and early August when Flextronics moved biz overseas. The move of Cisco and WebTV business to Mexico is great news for their Mexico plant, and the additional Advanced Fibre business is good news for the Chinese plant. And I don't believe the San Jose capacity remained 'slack' for long! San Jose is very tight in terms of assemble capacity utilization; we even know that Jabil is building out a greenfield site right now to add capacity in San Jose. I find it hard to believe that Flex's San Jose brand new (last year) facility that previously was doing work for these three companies is sitting idle in this business atmosphere. And the recent employment numbers released by FLEXF for their San Jose operations support it. I guess the Street can worry about a one quarter impact of the transitionary period in San Jose; its pretty hard to shift three major programs at the same time, and move new programs in without some dead time. But this worry seems overblown. The Astron losses in relation to the size of Flextronics doesn't seem terribly significant to Flextronics either, and now it seems that we are seeing signs of a turn in the board makers. Bottom line is that the company has said that they are comfortable with analyst estimates for the Sep and Dec quarters. We aren't going to see an earnings disappointment. Marks and Dykes have been upfront with announcing write-offs, warning about reduced margins (remember they resisted analyst attempts to upwardly revise earnings last spring), and they wouldn't say they are comfortable with earnings estimates this late in the Sep quarter, if they didn't pretty much have it in the bag. This leaves growth projections and growth visibility as reasons. Since much of Flextronics new business isn't generating headlines like some recent OEM outsource acquisitions, or doesn't seem to be generating rumors like some of the large OEM contracts let to other ECM players, the Street doesn't know where the growth is coming from. We don't have concrete news of big new blocks of business going to Flextronics. Much of the growth is coming from the ramp of business from existing customers. Also we know that Brazil, Mexico, and China got new or transferred business. Sweden should probably be flat this quarter, but should see some growth due to the new customers there in the near future. Marks still very pleased with the Neutronics unit (Hungary) and we know that this site got the HP inkjet printer business for Europe. This leaves only San Jose (which I've already discussed), and the smaller Malaysia and Scotland sites. Its pretty apparent that Flextronics have at least the sector growth rate in revenues coming. The question is whether they will be growing faster, and where and how? This is a little more like reading tea leaves. Based on Marks' answer to my question, that they are getting their share of major new contracts, and based on their expectations of the PC sector to grow to about 25% of revenues, I think we will see at least 40% revenue growth over the next year. And given that Marks mentioned that FLEXF (at 31-32 last Friday) is selling for less than ten times 1999 calendar year earnings, this stock seems a steal here. Well, we should see earnings for the SepQ in about four weeks. This could be the trigger point for this stock. Or when Jabil reports on October 6th, the big ECM stocks might get a boost even before then. Paul