Down but Not Out

01/20/2009 10:00 am EST


George Putnam

Editor, The Turnaround Letter

George Putnam IV, editor of The Turnaround Letter, says the stock of a big contract electronics manufacturer has been beaten down but may be ready to rebound.

The outsourcing of manufacturing is a growing trend in the electronics industry, and Flextronics (Nasdaq: FLEX) is well positioned to capitalize on that trend.

Flextronics designs and produces products for some of the best known original equipment manufacturers (OEMs) in the consumer electronics, telecommunications, computer, medical device, and automotive industries, among others. Its largest clients include Sony, Hewlett-Packard, Microsoft, Cisco, Eastman Kodak, Motorola, and Ericsson.

In 2007, Flextronics acquired Solectron, a large competitor (and former Turnaround Letter recommendation). Flextronics was proceeding well with the integration of Solectron when the global slowdown began earlier this year, hurting results and spooking investors. Flextronics’ stock has dropped by more than 80% since the beginning of 2008.

[But] the investors who’ve been selling the stock seem to be overlooking Flextronics’ many strengths in the growing market for electronics manufacturing services (EMS). It has the global scale to meet its customers’ increasingly complex needs and a strong balance sheet to make it a survivor almost regardless of how long and how severe the economic slowdown turns out to be.

With $33 billion in revenue, Flextronics is the second largest EMS provider in the world, behind only Hon Hai of Taiwan. It has 225,000 employees spread across 30 countries, including 100,000 in China.

Most importantly, the company has the number one or number two position in all of its principal markets except computers, where it is number nine. This global reach and scale allows Flextronics to provide high quality service at a very competitive cost.

Over the past few years, Flextronics has been able to broaden its product line into new areas such as medical devices, capital equipment, and automotive products, and it has already become the market leader in most of those segments. It has also diversified its customer base so that its top ten customers now account for about 53% of revenues, down from 68% two years ago.

Flextronics’ balance sheet is strong, with $1.7 billion in cash and most of its debt not coming due until 2012 and beyond. The company is still generating significant amounts of cash, and plans to use the cash to pay down debt and repurchase stock.

Results may be sluggish for several quarters as the electronics industry adjusts to the global slowdown, but even that may not be all bad as it may allow Flextronics to gain further market share from weaker competitors. When demand begins to pick up again, Flextronics should flourish. We recommend buying Flextronics stock up to $5. (It closed around $3 Friday—Editor.)

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