JPMorgan On Flextronics: Brains And Brawn, Initiates At Overweight

JPMorgan initiated coverage of Flextronics International Ltd. FLEX with an Overweight rating and $15 price target, saying the company's strategy to shift to higher margin businesses would increase market share and margin expansion.

The initiation note comes as Flextronics is set to report its fourth-quarter results on April 28. The Street expects earnings of $0.28 a share on revenue of $5.80 billion.

Analyst Paul Coster said he expects Flextronics, which is engaged in electronics manufacturing services (EMS), "to maintain significant market share in this competitive and mature EMS industry, supporting a revenue run-rate in the $24 billion–$26 billion range."

Looking Forward

"The company's EMS penetration of end markets stands at about 30 percent but the total addressable market could exceed $1 trillion," Coster explained.

Flextronics shifted its focus from lower-margin consumer and mature verticals toward higher margin growth sectors (HRS and IEI). Coster noted that this mix shift positions the firm to generate 5–10 percent net income growth on industry-aligned revenue growth of about 3–4 percent.

Related Link: Flextronics Hires John Carlson As President For Flex Medical Solutions

According to the note, the company is also poised for potential EPS-growth upside "from a commitment to returning 50 percent of FCF to shareholders in buyback programs."

Flextronics ended fiscal year 2015 with $554 million of FCF, of which about 76 percent was used for share repurchasing. The company expects to generate $3 billion–$4 billion of free cash flow in the five years ending in fiscal year 2017, the analyst added.

Noting gross margins, operating margins and EPS have trended up since mid-CY15, the analyst said, "We expect further modest improvement over the course of the next two years, primarily owing to mix shift."

In addition, Coster highlighted that the company's "recent focus on growth industries (IEI and HRS) and megatrends (IoT, mobility, cloud computing, renewable energy, smart infrastructure) should offset lack of growth in the traditional CTG and INS segments, and reactivate overall growth in FY18-19 (CY17-18)."

The analyst, who is focused on the company's growth opportunities in energy, auto electronics and medical technology, expects 10+ percent growth in HRS and IEI, "while a cyclical recovery in CTG and INS is expected to fuel mid-single-digit revenue growth in the out years."

Catalysts Ahead

Commenting on the upcoming catalysts, Coster sees the company's May 12 analyst day as a near-term catalyst and expects the acquisition of NEXTracker could result in Flextronics entering the PV Solar space with own-brand products.

"[A]t minimum, we expect the firm to emphasize growth opportunities in this alternative energy end-market," Coster added.

According to TipRanks, Coster has a success rate of 43 percent with an average return per recommendation of -6.9 percent. The analyst is ranked 3,694 out of 3,906 analysts.

At time of writing, shares of Singapore-based Flextronics were up 1.9 percent on the day, trading at $12.35.