The Value Case For Flextronics (FLEX)

This weekend we issued updated targets and scenarios for our favorite stocks in the under $10.00 universe, and Flextronics International Ltd. (NASDAQ: FLEX) was one of the value names that came in the screen out of the EMS universe in our screen for technology companies with low multiples in expected sales, earnings, and book value.  During the current market turmoil there are of course many caveats that would not be quite as strong. Regardless of the environment, there were some very low valuation when we screened this company.

Flextronics is also a special situation pickin our latest tech value screen of stocks with extremely lowmultiples.  Being an electronics manufacturing services company astechnology spending slowing has many obvious risks, but the company hasdiversified and grown with its Solectron acquisition which wascompleted in late-2007.  Its stock was pounded hard at -8.5% on Mondayalong with the market crash.

The forward valuations on this were shocking because so many havestarted to factor in a slowdown.  The market cap for Flextronics isnow $5.9 billion at a stock price of $7.04.  Because of charges andmore it shows up as having a loss.  Its fiscal March-2009 estimates of$1.19 and revenues expected to be $35.15 Billion give this one forwardmultiples of about 5.9-times earnings and 0.16-times revenues.  Thishas roughly $2.10 cash per share on the books and trades at about2.7-times tangible book value.

Its share price, along with many techs, is at the bottom of its $6.97to $13.60 trading range of the last year.  This EMS stock appearscheaper than the others in its field for a reason, and this may be partof the situation here.  Its acquisition of Solectron gives it what wethink is too high of a goodwill value and it carries $12.2 Billion intotal liabilities. 

Companies which go through difficult acquisition processes often tradedat cheap multiples while the street waits for it to prove itself andwhile it waits for all of the numbers on the books to normalize.  Thisone is no slam dunk and we are holding no assurances that those forwardestimates come to fruition.  But when we begin to factor in shortfallswithin reason, this still looks very reasonably priced. 

The stock is of course subject to the global slowdown we arewitnessing.  It is now diversified with manufacturing services globallyin sectors such as auto, computers, consumer digital products,industrial use, infrastructure, medical, and mobile segments.  Its tenlargest customers were responsible for 55% of net sales last quarterand it holds Ericsson as being more than 10% of sales, so it still hasa high customer concentration despite its diversification.

As a reminder, even with a bailout package there will be market turmoil.  This was part of our weekly "10 Stocks Under $10"newsletter selections.  Some of these stocks have taken down guidanceand some have not.  We have tried to filter out the lack of informationand put in our assumptions, but of course many of these scenarios arehighly dependent upon many factors not noted.

Jon C. Ogg
September 30, 2008