FLNG - Flex Ltd.: Behind The Scenes Renewables Manufacturer

Summary

• Flex has had a great 6 months as its OEM manufacture partnerships have performed well in a difficult market.
• With major investments in equipment for renewables, electric cars, and automation, Flex is well-positioned to benefit from a world in transition in energy and transport.
• The share price is up 57% in the past 6 months, and with $325 million in share repurchases (with $1 billion further to spend), the company looks interesting.

In late October Mike Zaccardi published a positive review of Flex Ltd. ( FLEX ) prior to the Q3 2022 earnings call . At that time FLEX's share price was flat for 2022. After the earnings call FLEX has seen a substantial share price increase. Mike has recently updated his previous article with an enthusiastic technical report . Here I add some additional colour with my views about a particular aspects of Flex's business which seems to me to be becoming significant.

Flex Ltd.

Flex is a key manufacturing and logistics supply company that you may never have heard of. It is a US-Singaporean based diversified manufacturing company. With a market cap of $8.19 billion, it is the 3rd largest global electronics manufacturing services, OEM company by revenue ($27 billion) with ~200,000 employees. It has manufacturing facilities around the world and a big presence in the automotive, cloud, communications, consumer devices, healthcare, and the industrial sector (capital equipment, robotics, industrial devices, clean energy and power). In short Flex is everywhere but mostly invisible, which is how it likes to be.

I first encountered Flex in researching the emergence of Australian flow battery company Redflow (ASX:RFX). Flex, Jabil ( JBL ) and Foxconn ( OTCPK:FXCOF ) each partnered with an emerging flow battery manufacturer (respectively Redflow, ViZn Energy and Imergy Power Systems). As it happened it was too early for flow batteries and each of the major OEM manufacturers pulled out as a major market didn't eventuate. I've kept my shareholding in Redflow and, following a number of reversals, there seem prospects for its flow batteries at last. The Flex partnership seemed to help Redflow to substantially improve its manufacture. It would be interesting if Flex revisited its interest in Redflow as flow batteries seem to be emerging as a significant stationary battery solution after a long time in the shadow of lithium batteries.

FLEX as a significant manufacturer for Enphase

I've realised recently that a significant partner for another of my early stage investments, Enphase ( ENPH ), is Flex. Enphase has grown dramatically since its early struggles and is now a leading microinverter, power management and battery supplier, which is moving into integrated home and small industrial power management, including integrating electric vehicles into the overall renewable power scene. FLEX seems to be a key partner involved with manufacturing products for Enphase for 15 years (i.e. almost from its beginning in 2006). FLEX is completing a new factory in Romania for Enphase European expansion, with recent launch of their IQ8 Microinverters in France and the Netherlands. It looks like the capacity will double in size shortly after the factory opens, so this is good business for Flex. It is also good business for Enphase to have such a competent and scalable manufacturer.

The situation is changing a lot in the US with focus on US manufacture. Barron's recently indicated that Flex is likely to benefit from a focus on local manufacture in the US. Enphase is planning 4-6 new facilities in the US by the second half of 2023. Since it doesn't manufacture itself, FLEX is a likely manufacturer for Enphase in the US. The two companies have 15 years' experience and Flex manufactures for Enphase in China, Mexico and Romania already.

Mostly I'm a big fan of ENPH and see a lot of upside for that stock and I'm reassured that FLEX seems very serious about its engagement with ENPH and other renewables businesses. Some good insights here for investors paying attention to the energy transition that is speeding up with Europe focusing on addressing the energy shortfall due to the Russian invasion of Ukraine and the US getting serious about clean energy and emissions reductions through the Inflation Reduction Act.

Flex segment reporting

Flex reports financial performance under three headings : Agility Solutions, Reliability Solutions and Nextracker. The financial performance of each section for the quarter ending Sept 30 2022 is as follows:

Flex Agility Solutions : $4.004 billion net sales (16% y/y growth); income $170 million

Flex Reliability Solutions : $3.299 billion net sales (34% y/y growth); income $175 million

Nextracker : $473 million net sales (40% y/y growth); income $43 million

The growth of Reliability and Nextracker in the quarter ending Sept 30 2022 was outstanding and this occurred notwithstanding continued semiconductor constraints in the Reliability segment. Agility experienced softness in the consumer devices area, while demand outpaced supply in the Cloud and Comms areas. Reliability benefited from strength in secular trends such as renewables and automation, and in Next-Gen Mobility and EV. Health Solutions performed strongly. Nextracker has a record (growing) backlog in large tracked solar installations, although panel availability remains an industry-wide challenge.

What the market thinks

Perhaps because many Flex products are not branded, Flex flies below the radar. Paying attention shows that this is a solid company that is benefitting from major developments, especially in the renewables space.

The company is little covered, with just 1 buy rating from a Seeking Alpha author in the past 30 days and 9 Wall Street ratings in the past 90 days that are strongly positive (5 strong buy, 3 buy and 1 hold). Seeking Alpha has recently switched its "hold" Quant ranking to "strong buy", although quant still gives it a poor C- Growth grade and modest B-for Profitability. On the other hand it has a A+ rankings for Momentum and Revisions and an A- rating for Valuation. FLEX was recently in the top 10 of US long-only portfolio overweight stocks.

The company does not pay a dividend, which might discourage some investors, although it has substantial share repurchase programs involving $253 million of share repurchase in 2022. As of September 30 2022 almost $1 billion ($977 million) was available for share repurchase under the current plan.

Since early October 2022, the FLEX share price performance is interesting. In 2022 FLEX tracked the S&P 500 for the first half, but in the second half of the year FLEX outperformed. FLEX is up 19.9% year on year, while the S&P 500 is down 18.9% over the past 12 months. Indeed the performance for the past 6 months for FLEX is up 56.6%, while the S&P 500 is up just 1.5%. This performance justifies the company reinvesting heavily rather than focusing on a dividend, but the question is whether recent growth in share price will be maintained.

FLEX versus S&P 500 performance over the past 12 months (Source Seeking Alpha).

Conclusion

Investing always involves a challenge in understanding how one is going to be rewarded. My expectation in relation to FLEX was initially that this is a company that has a balance of "out there" risk of the innovator, with a more cautious approach of not trying to be at the very front of innovation. The way I've seen it is that FLEX's focus is on excellence in execution and trying to minimize risk by seeking to be a manufacturer for companies with outstanding products who don't want to be tied down by becoming manufacturers. Enphase seems that kind of company and the partnership with FLEX seems to be a productive one for both companies as they get to focus on their special skills : FLEX manufacture, ENPH integrating and marketing products. I had expected that a company like FLEX might have a strong dividend policy to attract shareholders. This is not the case with FLEX as it doesn't have a history of paying a dividend, unlike FLEX LNG ( FLNG ) which might confuse some investors. Based on the past 6 months, FLEX is a company that might be attractive to investors seeking to be rewarded by share price gains. However over the past month FLEX share price performance, while still superior to S&P 500 performance, is not dramatically better than the S&P 500 (FLEX up 0.25%, S&P 500 down 5.7%). Mike Zaccardi has reached a similar conclusion to me about FLEX; he sees a company that has performed brilliantly at a time when a lot of tech stocks have struggled, but he suspects that in the short term this might be tempered. I think this stock is definitely worth paying attention to, but like everything in today's market there is a lot to balance up.

I am not a financial advisor, but I follow closely big changes happening as the world begins to transform energy and transport. Using this lens I see good prospects for FLEX, but it is for you and your financial advisor to see if there is a place for it in your portfolio.

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