- Flextronics earnings for Q1 2016 were announced after the market close on July 23.
- The company missed analyst revenue consensus with a 15% decline in topline while reporting earnings of 23 cents per share, in line with expectations.
- The company is a buy due to attractive valuations and expectations of strong earnings growth.
Global supply chain service provider, Flextronics (NASDAQ:FLEX), announced fiscal 2016 first quarter (Q1 2016) results after the close today. Net sales were slightly under $5.6 billion, down 15% YoY from $6.5 billion and missing analysts consensus estimates of $5.9 billion. The company missed the management's earlier guided revenue range of of $5.9 to $6.5 billion. Flextronics estimates revenue for the second quarter in the range of $5.9 to $6.5 billion, implying a 5 % topline decline at its midpoint. The strong dollar continues to hurt Flextronics' international sales.
Earnings per share came in at $0.23, in line with analyst consensus estimates, but down from $0.25 in the same quarter last year. Earnings per share is estimated at $0.22 to $0.28 per share in the second quarter.
In spite of slowing revenue, adjusted gross margin increased by 60 basis points year-over-year. Improvement was also seen in adjusted operating margin, which showed an increase of 10 basis points YoY. Flextronics Free Cash flow came in at $225 million, up from a negative free cash flow of 154 million in the year ago quarter. These numbers reflect good execution by the Flextronics management.
The reaction in Flextronics' stock was mildly positive, climbing 6 cents/share or half a percent in after-hours trading.
Although the slowing revenue is troubling, the company's financial ratios look very attractive. Flextronics P/E ratio (trailing 12 months) was 10.8 and PE ratio was 0.24 (as on July 23 closing price), both very reasonable numbers. It's forward P/E ratio was also attractive at 9.2. These are excellent numbers considering that analysts are expecting earnings growth of 14% annually over the next 5 years.
In addition, the company repurchased almost 8 million shares worth approximately $100 million. This action will support the stock price and is good use of excess funds to increase shareholder value. However, it is questionable as to where those funds are best served, buying back shares or paying off the company's debts, which exceeds its cash.
Not everything going on at the company is positive. The first and most important was already mentioned above: declining revenue. That's not a trend any company wants to continue.
Next, insiders have been selling heavily. SEC filings show that 3.9 million more shares were sold than bought by insiders in the last 3 months alone. That does not necessarily mean insiders see trouble ahead and want to cash out before it happens. It could mean that they want to raise cash to buy a house or balance their portfolios, but it is worth paying attention to and taking note of in the future.
Flextronics stock is volatile. In the past 12 months, it went from a low of $8.46 to a high of $12.86. That's a sizeable range of 52%. The stock closed the last trading session (July 23) at $10.89, down 15% from the April 6 high. However, if you look at the long-term picture, Flextronics stock has steadily climbed 78% in the last 3 years.
Flextronics stock chart by Amigobulls
In addition, Flextronics has come out with innovative new software called Flex Pulse, a real-time mobile tool that provides data and collaboration to manage global supply chains. Flex Pulse aggregates and interprets live streaming data from multiple sources. The software can help companies manage potential supply chain disruptions. The software was released on July 7, 2015.
This appears to be a good time to buy Flextronics stock for the following reasons:
- The low P/E and Price/Sales ratios represent low risk to buy for long-term investors
- Analysts predict steady growth of 14% annually
- Gross Margin and Operating Margin are improving
In spite of the troubling revenue picture, the future looks bright for Flextronics. However, if the dollar gets stronger or the world economy weakens, then the company's revenues will surely erode further. The stock is a strong buy as long as you keep an eye on the company's revenue picture.