Tuesday, December 20, 2005

Flextronics (FLEX)

I note that a research analyst at Morgan Stanley upgraded Flextronics (FLEX) this morning to an overweight.

There has been anecdotal evidence of a turnaround in demand in both quick turn and volume work. The book-to-bill ratio has firmed for the printed circuit board manufacturers. Better pricing conditions seem to exist. Conclusion...the macro picture looks decent, especially in North America.

The median earnings growth estimates for the 18 analysts who follow this is 18.75%. The actual calculated sustainable growth rate for the last five years has been approximately zero! The company, in the last five years has issued $2.5 billion in stock. Insiders have been heavy sellers of the stock as well, with net sales of over $16.6 million recently.

The return on invested capital in the last twelve months has been about 3%, down from historic levels of about 9%. This is a very tough business with gross profit margins at 5.76% in the latest quarter and operating margins in the 2% area.

The company has generated significant free cash flow in its March 05 FY but has a history of reinvesting in its business rather than returning capital to shareholders. Dividend is zero...buybacks are nada. Over $5.50 per share in goodwill tells you where the FCF went. Tangible book value is $3.53.

My conclusion...the macro recovery is there. Will shareholders experience it?


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