After years of slim profit margins and lackluster sales the electronic manufacturing service (EMS) market is regaining the shine of its not too distant past.
One of the leading EMS companies that is certain to ride the changing wave is Singapore-based contract manufacturer Flextronics International LTD (FLEX).
While you may not be familiar with the name, you have almost certainly come in contact with the products they manufacture for original equipment manufacturers (OEMs) including Alcatel SA (ALA), Casio Computer, Dell (DELL), Microsoft (MSFT), Motorola (MOT) and others. FLEX released fourth quarter results last week Thursday, April 27th that has led analysts to project $15 price targets.
FLEX is one of many companies in the EMS market that play a pivotal role for OEMs who are able to save time and money by outsourcing their manufacturing needs.
FLEX's team of engineers and supply chain managers are tasked with squeezing the costs of out the manufacturing process for OEMs by negotiating with multiple suppliers, finding alternative supplies at lower costs and in other cases suggesting design changes that will speed up production in the event that large volume orders ramp up.
Market research from Technology Forecasters Inc. recently released a report on the EMS and original design manufacturers (ODS) industries that points to the improving U.S. economy and growth in China as two factors that will continue to grow the business.
By the Numbers
FLEX reported net income of $43 million on $3.3 billion of revenue from its core EMS business for the 4th quarter ending March 31st. Net income for the same period a year ago was $74 million. FLEX attributes the decline to taxes, restructuring charges and other fees that it does not foresee continuing into the future.
FLEX also continues to lead all of its competitors with a 10 day cash conversion cycle, down substantially from the 15-days cycle seen in the year-ago quarter. The cash conversion cycle is a measure used by retailers to quantify how long it takes for inventory, which is typically purchased on credit, to be turned into revenues. A low cash conversion cycle means that FLEX can limit the amount of money it borrows to fund on-going operations.
FLEX made headlines in mid-April after the private equity firm Kohlberg Kravis Roberts & Co. announced it will buy their software business for $900 million. The sale of the software business is part of a plan to shed non-core businesses while focusing on the core EMS business. FLEX's new CEO (as of January 2006) Michael McNamara is working to position the company to take advantage of expected growth in the following core EMS sectors:
• Consumer Digital
• Industrial Semiconductor
FLEX has also taken a serious step into the arena of Original Design Manufacturing (ODM). ODM entails creating new products from start to finish, like Camera Modules. Once the product has been designed it can then be customized to fit the branding needs of OEMs before sales are made to the public.
Last month's insider transactions at FLEX reveal matching 100,000 share purchases by CEO Michael McNamara and CFO Thomas J Smach. In addition, the board of directors has also approved a $250 million dollar repurchase of ordinary outstanding shares which could be used to invest in working capital, pay down debt and possibly buy back stock in the future. Although FLEX hit an intraday 52-week high of $11.76 on Tuesday, May 2nd, it is still an attractive play in the recovering EMS market.