Focus On Lifecycle Services Will Deliver Long-Term Shareholder Value

Key Takeaways

• Strategic acquisitions and investment in data center technologies are set to boost growth and revenue in the U.S. market and cloud sector.
  
• Vertical integration and lifecycle services will enhance customer relations and operating margins, supporting long-term shareholder value.
  
• The pending acquisition and sector-specific slowdowns pose risks to Flex's margins and create uncertainty in revenue and earnings forecasts.

Catalysts

Provides manufacturing solutions to various brands in Asia, the Americas, and Europe.

• Flex's acquisition of Crown Technical Systems positions the company to capitalize on growth opportunities in the data center power sector, expected to enhance revenue and support growth in its modular power pod business, particularly in the U.S. market.
  
• The EMS plus product plus services strategy aims to drive margin expansion by focusing on high-value opportunities in diverse end markets, thereby improving net margins and contributing to cash generation.
  
• The expansion of the data center portfolio, including a significant investment in liquid cooling capabilities, is anticipated to sustain strong growth in the cloud business, contributing to revenue and operating income growth.
  
• Flex’s focus on vertical integration and lifecycle services is expected to enhance customer relations and drive operating margin improvements, even during market downcycles.
  
• Robust free cash flow generation, alongside strategic share repurchases, indicates a commitment to enhancing earnings per share and delivering long-term shareholder value.

Flex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Flex's revenue will grow by 3.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $3.33) by about December 2027, up from $841.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.1x on those 2027 earnings, down from 17.2x today. This future PE is lower than the current PE for the US Electronic industry at 26.0x.
• Analysts expect the number of shares outstanding to decline by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.76%, as per the Simply Wall St company report.

Flex Future Earnings Per Share Growth

Risks

• Flex has announced a pending acquisition of Crown Technical Systems, which involves integration risks and could impact net margins if synergies are not realized as planned.
  
• The guidance provided excludes the impact of the pending acquisition, which creates uncertainty in revenue and earnings forecasts until the acquisition is fully integrated.
  
• Macroeconomic slowing, particularly in the automotive and core industrial sectors, may lead to muted growth, affecting revenue and earnings for these segments.
  
• The company has seen some slowing in the automotive sector, which, if it continues, could result in under-absorption of costs and affect operating margins.
  
• While strong growth is noted in segments like data centers, a reliance on certain sectors for strong performance raises risks of volatility in overall financial results if key growth areas experience downturns.

Valuation

• The analysts have a consensus price target of $42.89 for Flex based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $46.0, and the most bearish reporting a price target of just $36.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $28.5 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 7.8%.
• Given the current share price of $37.4, the analyst's price target of $42.89 is 12.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.