We updated our research report on Plexus Corp. PLXS on Jun 25.
The company reported strong first quarter 2015 earnings with both the top and bottom lines surpassing the Zacks Consensus Estimate. The company provided an upbeat second quarter guidance. New program wins across key sectors and global expansion will drive growth over the long term. The disengagement from Juniper will improve product mix. Additionally, the consolidation of the company’s production facilities in low-cost areas is expected to boost margins. However, a mature electronic manufacturing services market, lack of revenue diversification and intense competition are headwinds for the company.
We believe that a healthy number of program wins will drive the stock, going forward. In 2014, Plexus won new programs worth approximately $816 million in the manufacturing solutions business. In the reported quarter, the company had secured 32 program wins, which it expects will generate annualized revenues of $190 million. As an engineering-focused EMS player, it is well positioned to benefit from the increasing outsourcing trend among health care, industrial and defense/aerospace OEMs. Given its exposure to high-growth segments and continuing improvements in health care, industrial, commercial and defense/aerospace sectors, we believe that the company will outgrow peers in the EMS group over the long term.
Plexus continues to suffer from broad-based macroeconomic headwinds as well as softening end-market demand. The company’s significant exposure to the slowing Networking and Communications industry remains a concern. Although Plexus is working toward diversifying its revenue stream across different industries, approximately 35% of its revenues still come from the Networking sector. Disengagement from Juniper negatively impacted the segment as net sales declined 7.7% ($63.8 million) on a year-over-year basis in fiscal 2014. The Industrial and commercial sector is also expected to remain a major headwind due to tepid end-market demand and challenges faced by some of the top customers. Despite new program wins, we believe these will hurt top-line growth going forward.
Currently, Plexus has a Zacks Rank #3 (Hold). Better-ranked stocks include Synacor, Inc. SYNC, PetMed Express, Inc. PETS and Avery Dennison Corporation AVY, all carrying a Zacks Rank #2 (Buy).
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