Market Overview

Despite Selloff, Argus Calls Flextronics A Buy On Improving Product Mix

Despite Selloff, Argus Calls Flextronics A Buy On Improving Product Mix

Argus reiterated its Buy rating on Flextronics International Ltd. (NASDAQ: FLEX), which recouped some of its losses after a selloff on concerns that the company's traditional business in the communications & enterprise compute segment could weaken going forward.


"As demonstrated by poor 2Q16 results from Ericsson (a Flex customer), demand for new equipment is weak among traditional telco service providers. While enterprise networking is somewhat steadier, prospects for M&A (i.e., Dell-EMC) may push purchasing managers to the sidelines while they assess the changed landscape," analyst Jim Kelleher wrote in a note.


On the positive note, the company's High Reliability Solutions (HRS) unit benefits from its strong position in automotive and Consumer Technology Group (CTG) seems to be moving away from unstable mobile phone business to newer customers such as Nike Inc (NYSE: NKE) and Bose.

Related Link: Bank Of America Reinstates Buy On Flextronics International, Announces $15 PT

Guidance, Expectations

"We expect margins to expand and EPS to grow faster than revenue as the business mix continues to shift away from traditional technology EMS and toward broader industry applications with higher margins," Kelleher noted.

Despite weakness in its traditional business, Flextronics grew its fiscal first-quarter 2017 revenue by 3 percent to $5.72 billion, which was also toward the top of management's guidance range and above consensus.

But, Flextronics shares were pressured after the company guided cautiously for fiscal second quarter. For the second quarter 2Q17, Flextronics guided for revenue in a range of $5.8 billion–$6.2 billion and non-GAAP EPS of $0.26–$0.30 per share.

At the respective guidance midpoints, revenue would be down 5 percent year-over-year, while non-GAAP EPS would be up 4 percent, reflecting the improving business mix. Meanwhile, midpoint guidance also missed the pre-reporting consensus forecasts of $6.15 billion in revenue and $0.27 in non-GAAP EPS.

"Despite this miss, the longer-term outlook is positive for three out of the four end markets. We are modeling flat FY17 revenue followed by modest gain in FY18, and we continue to model positive EPS trends for both years," Kelleher added.

Given the cautious outlook for CEC, Kelleher cut his non-GAAP EPS forecast for the March 2017 fiscal year to $1.20 a share, from a prior $1.28. The analyst's long-term earnings growth rate forecast is 10 percent.

The analyst also raised his price target on the stock by $1 to $16.

At time of writing, shares of Flextronics had gained 0.27 percent on the day to $13.03.

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