FLEX - Flex: Growth Potential After The Nextracker Spin-Off

2024-01-20 04:43:32 ET

Summary

• Flex experienced a stock drop post-spin-off of Nextracker.
• Despite the dip, Flex showcases strong financials, positive guidance, and a decade-long history of returns.
• Nextracker's spin-off and market reaction offers an attractive entry point, with Flex focusing on growth and profitability.

Flex Ltd. (FLEX), an American multinational diversified manufacturing company, has recently undergone significant changes with the spin-off of Nextracker Inc . (NXT). This move has led to a temporary drop in Flex's stock price, primarily due to portfolio reallocation by investors. However, there are several reasons for potential investors to remain bullish about Flex. The company has demonstrated strong financial performance with its core offerings. Furthermore, Flex has provided positive guidance for Q3 2024 and fiscal year 2024, indicating expected growth in revenue and earnings. Over the last ten years, it has rewarded investors with 207.87% in returns. Furthermore, due to the price drop, the stock currently has an attractive FWD price-to-earnings ratio of 8.76. Therefore, investors may want to take a bullish stance on this stock.

Company overview

Flex, formerly known as Flextronics International, is a major player in the global electronics manufacturing services ((EMS)) and original design manufacturing (ODM) sectors, ranking as the third-largest company by revenue. It has successfully diversified its operations beyond traditional electronics and technology OEM companies, venturing into non-traditional niches such as consumer, medical industrial, and automotive industries. The company's operations are divided into three segments: Flex Agility Solutions, Flex Reliability Solutions, and a spun-off segment, Nextracker, which IPOd in February 2023 .

While Nextracker represents a smaller portion of the business, it has demonstrated significant year-on-year growth.

Focusing on the Flex Reliability and Flex Agility Solutions segments, the company is poised to benefit from several tailwinds. These include the increasing demand for electrification from its automotive customers, a growing demand for EV charging, and the expansion in AI-driven cloud spending. Flex is actively working on enhancing its gross margins and has revised its FY2024 guidance upwards. Potential investors should take note that Flex is slated to release its Q3 2024 earnings on 31 January 2024.

Negative market reaction

Following the announcement of the completion of the spin-off of Nextracker, Flex experienced a significant market reaction. The company's stock value declined by 23.93% since the spin-off was completed on January 2. The spin-off resulted in Flex shareholders receiving approximately 0.17 shares of Nextracker Class A common stock for every Flex ordinary share held as of the record date of December 29, 2023.

This development could have prompted a portfolio reallocation by investors who may not have been interested in holding Nextracker shares. As a consequence of the spin-off, Flex no longer holds any direct or indirect shares of Nextracker common stock or any securities convertible into or exchangeable for shares of Nextracker common stock. This shift in business structure might not have aligned with the investment strategies of some shareholders, leading them to sell their shares. The market's reaction to the spin-off announcement could have also played a role. If the initial reaction was negative, it could have triggered a sell-off. For potential investors, this presents an opportunity to enter at a lower price point.

Financials and valuation

To evaluate Flex's financial performance, it's crucial to consider its earnings both with and without Nextracker. Despite an anticipated near-term reduction in its top and bottom lines, the company is showing signs of improvement, such as an increased gross profit margin. Flex's optimistic forecast for Q3 and FY2024, projecting growth in both operating and gross profit margins, reflects its confidence in its future trajectory. Moreover, Nextracker, a spin-off from Flex, reported a 21% YoY increase in revenues to $0.6 billion in Q2, suggesting a promising future for Flex shareholders who received shares in the spin-off.

Examining key financials for Q2 2024, Flex's levered free cash flow is positive, although the trailing TTM figure of $183.3 million is lower than that of FY2023. A positive cash flow enables the company to reinvest in the business, pay off debts, and provide returns to investors.

A glance at the balance sheet reveals that the company has a total cash reserve of $2.9 billion. With a current ratio of 1.53, Flex can cover its short-term liabilities. However, investors should exercise caution as its quick ratio is under 0.72.

Flex is also trading at a low FWD price-to-earnings ratio of 8.76, which is below its five-year average of 9.74 and significantly under the Information Technology sector median of 23.36. This suggests that the stock may be undervalued.

Flex's strategic focus on growth in its target markets, expanding margins, and implementing an effective capital allocation strategy is poised to drive future growth and enhance profitability. The spin-off of Nextracker, seen as the final step in unlocking its full value, could potentially boost shareholder value. The successful completion of this complex transaction is a testament to Flex's strong execution capabilities.

Risks

When it comes to investing, there are always risks that need to be considered. In this particular case, the stock has dropped by over 20% since the company announced its spin-off of Nextracker completion. It's important to keep in mind that with any big strategic action, there are risks involved, and the market may not always be on your side. This could potentially impact the overall financials of the company. While spin-offs can often unlock value, there's uncertainty surrounding the success of Nextracker and its subsequent impact on Flex's performance. Additionally, rapid changes take place in the technology and manufacturing sectors, which could pose operational risks. If Flex fails to adapt to these changes or experiences disruptions in its supply chain, the company's performance could be negatively affected.

Final thoughts

Despite the temporary drop in Flex's stock price following the spin-off of Nextracker Inc., the company's strong financial performance, positive guidance for Q3 2024 and fiscal year 2024, and a decade-long track record of rewarding investors make it an attractive investment opportunity. The current forward price-to-earnings ratio of 8.76 further enhances its appeal. Flex's strategic focus on growth in target markets, margin expansion, and effective capital allocation, coupled with its diversified operations and strong position in the global electronics manufacturing services sector, suggest a promising future. Therefore, investors may want to consider a bullish stance on this stock.

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