Summary
- Flex has seen a solid 2022.
- On top of solid operating momentum, Flex furthermore benefits from the IPO of its subsidiary Nextracker.
- The situation looks quite interesting here.
Shares of Flex ( FLEX ) have risen to fresh highs near the $25 mark, the highest levels since the dotcom crisis. Just a $13 stock ahead of the pandemic, shares initially fell, but rallied to the $20 mark in 2021, as many names were seeing a huge rally at the time.
After a period in which shares stagnated between $15 and $20, shares have seen a big rally since the end of 2022 as investors were upbeat on Flex after the company spun out its solar track business Nextracker in a hugely successful IPO over the last week.
The Base
In May 2022, Flex posted its annual results. The company generated $26.0 billion in sales in its fiscal year 2022, up from $24.1 billion in the year before. The contracting manufacturing nature of the business makes that margins are slim as operating margins came in at $972 million, for margins at 3% and change. Driven by a $225 million incidental income and modest tax rate, net earnings came in at $936 million, equal to $1.96 per share based on 483 million shares outstanding, in line with the adjusted earnings being reported.
Net debt came in at a very manageable $1.2 billion number as the company guided for modest growth for the fiscal 2023 results. The company initially guided for revenues to rise to a midpoint of $28.2 billion in sales albeit ahead of the worst inflationary impact seen last year. The company guided for adjusted earnings between $2.09 and $2.24 per share, with GAAP earnings seen between $1.63 and $1.78 per share.
The core portfolio of Flex remains positioned to long-term mega trends including automotive, health solutions, industrial, lifestyle and consumer devices. Of the $26.0 billion revenue base, Flex relies on two larger segments. Agility is a $14.0 billion business which posts adjusted operating margins around 4%, as the Reliability segment is a bit smaller with $10.6 billion in sales, yet margins of this unit are reported in excess of 5%. Nextracker was the third division, a $1.5 billion business with margins coming in excess of 6%.
Following a solid first quarter earnings report , Flex hiked the midpoint of the full year sales outlook to $28.9 billion, as the company maintained the earnings guidance. The sales guidance was hiked further to $29.6 billion following the second quarter earnings report , with Flex now hiking the adjusted earnings guidance to $2.20-$2.25 per share.
Momentum continued with sales seen up to $30.1 billion following the third quarter earnings report , with earnings now seen between $2.27 and $2.33 per share. Net debt has risen to $1.5 billion amidst continued buybacks which have reduced the share count to 459 million shares. Trading at $24, the company commands an $11.0 billion equity valuation, or $12.5 billion enterprise valuation.
Nextracker IPO
In 2022, Flex announced its plans to spin out it subsidiary Nextracker ( NXT ) which was a success, as covered in this article. Trading at $30, the solar tracking business is awarded a massive $4.6 billion enterprise valuation. With Flex owning about two thirds of the shares, Flex will still hold about $3.0 billion worth of shares post the offering.
That is huge, equivalent to about $6.50 per share in terms of Flex's share base. In fact, Flex sold a near 17% stake to TPG just ahead of the offering which makes that the company has raked in a couple of hundreds of millions on top of the $6.50 per share number.
This means that outside the stake held in Nextracker, Electronics essentially does not trade at $24 per share but at $17.50 per share, and that is for a business set to post adjusted earnings of around $2.25 per share. Cutting these earnings estimates by approximately 10%, given that Nextracker generates about 6-8% of total Flex sales (albeit with an above average margin profile). This makes that the situation looks highly compelling at about 9 times earnings of the core operation pegged at around $2 per share if we back out Nextracker.
This looks quite compelling, but the truth is that following the performance of the shares of Flex in the recent past makes that quite some good news has been priced in already, perhaps too much. While the realistic 9-10 times earnings multiple is apparently low, it is the core operations of Flex which are quite cyclical, albeit better positioned than they were in the past.
At the same time, I recognize that Flex has never fetched a huge multiple. Hence, I remain interested in Flex in an attempt to set up a potential pair trade here, but for now I remain on the sidelines.
For further details see:
Flex: Flexing Its Muscles