Stock of the Week - September 28, 2009

STOCK OF THE WEEK - September 28, 2009 Flextronics International Ltd. (nasdaq: FLEX) Very few investments outside of short-term government bonds escaped the fury of the slow motion stock market crash that began just about one year ago. On the flip side, very few investments have escaped the violent updraft of the new bull market since March of this year.  Put contract manufacturers in the majority. Shares of companies that do outsourced electronic manufacturing work crashed hard but have come off of the market bottom with gusto. In this group are companies like Jabil Circuit (nyse: JBL), Flextronics International (nasdaq: FLEX), Celestica (nyse: CLS), Sanmina-SCI (SANMD) and other specialized players. Paul McWilliams, editor of Next Inning Technology Research, just released his third quarter "State of Technology" report covering electronic manufacturing services companies.  One company getting a strong nod from McWilliams is Flextronics, rated as a "strategic" investment. "Strategic doesn't necessarily mean low-risk," says McWilliams. "To be sure, FLEX's balance sheet makes it one of the higher risk investments on the strategic list, but there are other redeeming qualities." "Very much in line with the contentions I stated last December when FLEX was trading at a Blue Light Special price, its 233% gain during the last nine months puts it at the top of the EMS sector," notes McWilliams, who was pounding the table for FLEX at $2 and lower late last year. The stock has since quadrupled, trading just below $8 per share. SPECIAL OFFER Tech Stock Bull Market Technology has been a fine place to be in the market this year, and the stocks recommended by Paul McWilliams in the Next Inning model portfolio have been even finer. Several of his calls in semiconductors and networking like Cree have doubled or tripled. Click here for all of his current buys and sells in Next Inning Technology Research. Among the factors in Flextronics' favor, says McWilliams, is a movement toward domination by large players of high-volume products ranging from cell phones to personal computers and smaller devices.  "I believe FLEX has positioned itself very well for this through its purchase of Solectron and the success it has had this year in co-designing some of Hewlett-Packard's recent hits in the notebook and netbook space," says McWilliams. "Due to the modifications FLEX has made to its business model through both its acquisition of Solectron, which significantly bolstered its presence in the PC sector, and its exposure to Hewlett-Packard (HPQ), and its intensified strategic focus on certain high volume market sectors, FLEX competes more directly with sector leader, Foxconn, than any of the other EMS companies in our State of Tech coverage," notes McWilliams. "Foxconn is an extraordinarily well-run business that, like many Taiwanese companies, sets the standards for low overhead (low operating costs). This is exactly opposite of the strategy that we've seen at smaller EMS companies that have reduced exposure to the PC and some consumer sectors. The implication here is that FLEX is playing a fairly high stakes game and that implies added risks along with the higher potential rewards if it does well." Flextronics took restructuring charges of roughly $150 million during the March quarter and wrote down the value of goodwill and intangible assets on its balance sheet. The company estimates that it will save $250 million to $260 million as a result of all of its restructuring. McWiliams looks for forward earnings to be "something around $0.70" and at current prices is valued "comfortably low." He also believes "FLEX will trade in double digits" next year. Contract wins with Dell and H-P are encouraging, but it's the opportunity ahead in existing markets that may turn out to be the company's strongest growth catalyst.  "In addition to doing well in the high-volume markets, FLEX is by far the largest player in the low-volume/high mix markets where the other participants focus," says McWilliams. "It's the combination of this end market mix, FLEX's strict control of costs, strong balance sheet management and flexible operating model that carried FLEX through this downturn and it's the pent up scale of the model that I believe will lead it to grow profits well above revenue and, as such, faster than what the analysts' consensus expectations suggest they are expecting. My thinking is we'll see an early sign of this in calendar Q3 where I expect FLEX to report revenue around $6B and a non-GAAP operating profit margin above 2%." Click here to receive Forbes.com's Stock of the Week each Monday, free via email.

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