New Facilities In Malaysia And AI Investments Will Streamline Operations

Key Takeaways

• Strong performance in sustaining services and engineering solutions predicts future revenue growth and supports EPS increases.
  
• Strategic investments in talent, technology, and facilities aim to improve efficiency, operating margins, and shareholder value.
  
• Dependence on specific sectors and regions may pose concentration risks amid trade uncertainties and fluctuating sector demands, affecting revenue stability and operational costs.

Catalysts

Provides electronic manufacturing services in the United States and internationally.

• Plexus achieved its largest-ever win for sustaining services and the best quarterly engineering solutions performance in over five years, indicating strong future revenue growth. This is likely to impact revenue positively.
  
• The company's strategic investment in talent (such as trade compliance and logistics), technology (including AI), and new facilities like the upcoming site in Malaysia supports process automation, efficiency, and defect reduction, which is expected to improve operating margins.
  
• Plexus anticipates up to $100 million of free cash flow for fiscal 2025, empowering the company to create additional shareholder value, potentially through buybacks or other capital allocation strategies, which would enhance earnings.
  
• Robust demand in the aerospace and defense market sector and growth supported by new program wins in the semi-cap market indicate potential revenue increases and margin stability. This growing demand, despite broader market uncertainties, supports EPS growth.
  
• Ongoing strategic investments in facilities and capabilities are positioning Plexus to navigate market complexities and focus on optimizing working capital, which could improve both net margins and free cash flow.

Plexus Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Plexus's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 4.9% in 3 years time.
• Analysts expect earnings to reach $234.0 million (and earnings per share of $7.9) by about May 2028, up from $142.7 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 22.1x on those 2028 earnings, down from 23.8x today. This future PE is greater than the current PE for the US Electronic industry at 20.0x.
• Analysts expect the number of shares outstanding to decline by 1.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Plexus Future Earnings Per Share Growth

Risks

• The ongoing uncertainty of tariffs and trade policies could lead to increased costs or reallocation of supply chains, which might impact Plexus's operational expenses and overall profitability.
  
• Fluctuations in demand across sectors such as industrial and aerospace, with specific mention of reduced demand in the aerospace subsector, could affect the company's revenue growth.
  
• Heavy reliance on certain regions or sectors for wins, such as significant dependence on the healthcare and semiconductor sectors, poses a concentration risk that may impact revenue stability if demand in these areas declines.
  
• Mixed signals from market sectors, such as fluctuating inventory management and uneven trends in industrial subsectors, could create volatility in Plexus’s revenue projections and operational plans.
  
• Tariff volatility and potential changes in customer supply chain strategies could lead to increased operational costs and challenges in maintaining competitive net margins.

Valuation

• The analysts have a consensus price target of $160.5 for Plexus based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.8 billion, earnings will come to $234.0 million, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 7.4%.
• Given the current share price of $125.46, the analyst price target of $160.5 is 21.8% 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.