At times, it is prudent to hold on to certain stocks that have enough potential but are weighed down by tough market conditions. Flex Ltd. FLEX seems to be one such stock, which investors need to retain if they are looking to reap long-term benefits. Though the stock is facing a few headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run.
Shares of Flex have gained 26.5% year to date, significantly outperforming the 13.4% rally of the industry it belongs to.
Factors in Favor of Flex
Flex had reported stellar fiscal second-quarter 2018 results, wherein both the top and bottom line surpassed the Zacks Consensus Estimate. Revenues also increased year over year primarily owing to the company’s focus on Industrial & Emerging Industries (“IEI”) and High Reliability Solutions (“HRS”) segments which improved diversification.
The company has a diverse end-market as well as customer base thanks to its “Sketch-to-Scale” approach. Moreover, based on its growing intellectual property (“IP”) portfolio (1,200 patents, 1,100 pending), the company is well positioned to address the needs of customers who are looking to leverage the proliferation of Internet of Things (IoT), autonomous/connected cars, artificial intelligence (“AI”), Industrial automation, augmented & virtual reality (AR/VR), and 5G technologies.
Flex thrives on low-cost manufacturing. The low-cost manufacturing improves competitiveness of its customers, which is a key catalyst. At the end of fiscal 2017, almost 80% of its manufacturing footprint was located in low-cost locations, such as Brazil, China, Hungary, India, Indonesia, Malaysia, Mexico, Poland, Romania and Ukraine. It is to be noted that the low-cost strategy along with “Sketch-to-Scale” approach in diversified end-markets has made Flex a ready-to-go partner for brands and companies like Fossil, Skullcandy, Nike, Savari, Caruma Technologies among others.
Acquisitions, over time, have been Flex’s most favored mode for expanding manufacturing footprint as well as penetrating new end markets. In the last five years, the company acquired 17 companies, most of which expanded the capabilities of HRS and IEI businesses. Apart from these, the company has made several smaller acquisitions over time, which has expanded capabilities in the medical devices, consumer electronics, household industrial and lifestyle market. The recently acquired AGM Automotive further increases the company’s capabilities in the automotive market. Expanding automotive business driven by a plethora of acquisitions drove HRS revenues in fiscal 2017.
The company has an expected EPS growth rate of 16.7%. Notably, the stock has delivered positive earnings surprises in three of the trailing four quarters with an average beat of 1.7%.
Risks Persist
The company faces stiff competition from other EMS providers like Jabil Circuit, Benchmark Electronics, Celestica, Sanmina-SCI Corporation and Taiwan-based Original Design Manufacturing (ODM) suppliers like Foxconn. Intensifying competition negatively impacted contract wins, which hurt top-line growth. Moreover, continuing investments on “Sketch-to-Scale” portfolio transition is expected to increase operating expenses. This will eventually keep margins under pressure at least in the near term.
Further, Flex’s balance sheet is highly leveraged, which adds to the risk of investing in the company.
Our Take
We expect the aforementioned factors to help the company sustain strong momentum and stay afloat amid difficult times. Hence, we suggest that investors hold on to the stock for the time being.
Key Picks
Some better-ranked stocks in the broader technology sector are NetApp, Inc NTAP, NVIDIA Corporation NVDA and Western Digital Corporation WDC, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
NetApp, NVIDIA and Western Digital have a long-term expected EPS growth rate of 11.34%, 10.25% and 31.12%, respectively.
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