Flextronics Flexes Its Tech Muscles

10/09/2002 12:00 am EST

Focus:

Stephen Leeb

Founder and Research Chairman, Leeb Group

Stephen Leeb’s newsletter, Personal Finance, won or placed in the Newsletter Publishers Association's Best Financial Advisory Newsletter awards in 1991, '92, '94, ’95, '96, '99, '00, and 2001. The newsletter has long been among my personal favorites, due to both its long-term success in stock picking and its wide-ranging coverage of a variety of markets and stocks. Whether focused on small cap or large cap, domestic or international, or speculative or conservative investments, Stephen Leeb is an experts’ expert. Here’s his latest buy recommendation.

“The evidence is mounting that tech is turning. Whatever statistic you pick, inventory levels, book-to-bill ratios, or spending on tech equipment, the picture is of an industry beginning to claw its way back. One of the surest, cheapest, and most leveraged ways of playing a tech revival is with engineering manufacturing service (EMS) companies. These companies perform outsourcing services–ranging from design to manufacturing–for virtually the entire range of tech participants.

We are adding the premier EMS company–Flextronics (FLEX NASDAQ) to our list of Foundation picks in our Growth Portfolio. In less than a decade, Flextronics, through a combination of acquisition and internal growth, has amassed astounding gains in revenues–from $100 million a year to a projected $15 billion in 2003. The former upstart is now the largest EMS company and is positioned to lengthen its lead of its competitors. Skilled financial management and the largest presence in the lowest cost manufacturing locations are major reasons. For example, its nearly 4.5 million square feet in China far exceeds any other EMS company in that lowest of low-cost countries. 

Despite its aggressive expansion and high-operating leverage, Flextronics remained very profitable throughout the tech downturn. In the three-year period from 2000 through 2002, though profits declined, free cash flow rose and balance sheet metrics such as debt-to-equity ratios improved. During the next five years we expect earnings to grow in excess of 20% a year. This company is a triple play, as gained with income from growth in tech, market share gains by the EMS industry as they take over ever-greater functions, and continued market share gains within the EMS industry itself. 

Mid-decade profits could reach $2 a share. That you can find such outsized growth potential in a stock that trades at a discount to next year’s book value makes this one a must hold for value and growth investors. Buy Flextronics up to 11. Our 18-month target is a move to at least 16.”

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