2023-10-20 08:42:08 ET
Summary
- Flex Ltd. is an international supply chain and manufacturing solutions provider. They work with electronics and technology companies to design, build, and deliver a wide variety of products and services.
- Although recent guidance is positive and they exist in an in-demand niche, the company does not produce particularly attractive annual returns.
- After reviewing their financials and valuation, I presently rate FLEX as a hold.
Thesis
I am perpetually searching for potential long-term compounders and have been looking at industries positively affected by the Inflation Reduction Act. With the photovoltaics industry already experiencing a boon from its extremely low Levelized Cost Of Energy, I believe it will stand to benefit more than most other energy sources. However, with photovoltaic panels becoming heavily commoditized, I have been avoiding panel manufacturers and am instead searching for opportunities in their ancillaries.
Flex Ltd. ( FLEX ) caught my attention when researching Enphase ( ENPH ) because of their long-term relationship and recent expansion of operations in the United States . After looking over their financials and valuation, I presently rate Flex as a Hold.
Company Background
Flex Ltd. is an international supply chain & manufacturing solutions provider. The company was formerly known as Flextronics International Ltd. and changed its name to Flex Ltd. in September 2016. They mostly focus on design and engineering, rapid prototyping, fulfillment, component services, and circular economy solutions. They work with electronics and technology companies to design, build, & deliver a wide variety of products and services. The company maintains operations in Asia, the Americas, and Europe. Flex operates through three segments: Flex Agility Solutions ((FAS)), Flex Reliability Solutions ((FRS)), and Nextracker.
The Flex Agility Solutions segment offers manufacturing and supply services for communications, consumer devices, lifestyle and consumer devices. The enterprise and cloud portion includes data, edge, and communications infrastructure. The lifestyle portion includes appliances, floorcare, audio, consumer packaging, and micro mobility.
The Flex Reliability Solutions segment consists of automotive, industrial, and health solutions. The automotive portion includes autonomous, connectivity, electrification, and smart technologies. The industrial portion includes capital equipment, industrial devices, and renewables. The health solutions portion includes medical devices, medical equipment and drug delivery.
The Nextracker segment had been operating as an independent subsidiary of Flex since 2015 and was spun off last year . Flex is still a majority shareholder of Nextracker Inc. ( NXT ). They provide solar tracking and software solutions for utility-scale and ground-mounted projects which optimize and increase energy production.
Long-Term Trends
I found two estimates for the global electronic contract manufacturing and design services market, one projected a CAGR of 9.7% until 2030, the other projected a CAGR of 9.3% until 2032.
Because the company stands to benefit from its long-term relationship with Enphase, I feel it is also relevant to cite the projected growth for both photovoltaics and microinverters. The global solar panel market is projected to experience a CAGR of 18% through 2030. The global microinverter market is expected to have a CAGR of 17.8% until 2028.
Guidance
Their most recent earnings call transcript indicated the first quarter fell within their expectations. They cited that markets remain soft from higher interest rates and lingering post-COVID spending renormalization. They expected demand for their enterprise IT to begin slowing, but so far it has been performing in line with older expectations.
They continue to find the adoption of AI is benefiting their operations and have a positive outlook on it continuing to do so.
"There's a lot of hype around AI right now. Maybe I can help separate a little fact from fiction, at least for what it means to us. We all know that the compute and power requirements of generative AI are highly intensive. This has led to changing technical requirements in the data center. From a manufacturing perspective, these changing needs are creating new opportunities, I should say, however, this has been the trend for a little while now and it's already driving some of our business."
Their FAS segment experienced a year-over-year retraction, while their FRD and Nextracker segments both experienced growth.
FLEX Segment Performance (Q1 2024 Presentation Pg. 8)
It is unclear to me how much Flex will be affected by the ongoing UAW strike, but their overall projections for their separate segments for fiscal 2024 is positive.
FLEX Segment Outlook (Q1 2024 Presentation Pg. 10)
Their quarterly guidance has them expecting between $7.3B and $7.7B in revenue.
FLEX Q2 Guidance (Q1 2024 Presentation Pg. 11)
Their annual guidance has them expecting between $30.5B and $31.5B in revenue.
FLEX 2024 Full Year Guidance (Q1 2024 Presentation Pg. 12)
Annual Financials
Annual revenue experienced a low in 2017 and again in 2021. It has grown significantly over the last two years. In 2014 they had an annual revenue of $26,108.6M. By 2023 that had grown to $30,346M. This represents a total rise of 16.23% at an average annual rate of 1.8%.
FLEX Annual Revenue (By Author)
They experienced a dip in gross margins from 2017 to 2019. As of the most recent annual report, gross margins were 7.54%, EBITDA margins were 5.64%, operating margins were 3.99%, and net margins were 2.61%.
FLEX Annual Margins (By Author)
Their share count continues to fall while both cash and income have grown. Total common shares outstanding was at 591.4M in 2014; by the end of 2023 that fell to 450.1M. This represents a -23.89% decline in share count, which comes out to an average annual rate of -2.65%. Over that same time period operating income rose from $595.2M to $1,211M, a 103.5% total increase at an average rate of 11.5%.
FLEX Annual Share Count vs. Cash vs. Income (By Author)
Their debt has been rising over the last several years. As of the 2023 annual report, they had -$201M in net interest expense, total debt was $4,475M, and long-term debt was $3,691M.
Their annual cash flow is inconsistent. As of this most recent annual report, cash and equivalents was $3,294M, operating income was $1,211M, EBITDA was $1,712M, net income was $793M, unlevered free cash flow was $349.9M, and levered free cash flow was $205.5M.
FLEX Annual Cash Flow (By Author)
Their total equity growth rate appears to have inflected upward in recent years.
FLEX Annual Total Equity (By Author)
Their return on invested capital fell to lows in 2019 and 2020, but has improved since then. As of the most recent annual report ROIC was 7.79%, ROCE was 5.88%, and ROE was at 13.90%.
FLEX Annual Returns (By Author)
Quarterly Financials
Their quarterly financials are showing gradual changes in quarterly revenue. Eight quarters ago Flex had a quarterly revenue of $6,342M. Four quarters ago that had grown to $7,347M. By this most recent quarter that had fallen to $7,336M. This represents a total two-year increase of 15.67% at an average quarterly rate of 1.96%.
FLEX Quarterly Revenue (By Author)
Their gross margins have been expanding over the last several quarters. As of the most recent quarter gross margins were 8.23%, EBITDA margins were 6.09%, operating margins were 4.28%, and net margins were at 2.54%.
FLEX Quarterly Margin (By Author)
Their buyback rate appears to have dropped. The sum of their last eight quarters of buybacks comes to 8.47%; over the last four quarters this has dropped to 1.87%.
FLEX Quarterly Share Count vs. Cash vs. Income (By Author)
The most recent quarter, Flex had -$29M in net interest expense, total debt was at $4,109M, and long-term debt was at $3,444M.
FLEX Quarterly Debt (By Author)
As of the most recent earnings report, cash and equivalents were $2,660M, quarterly operating income was $314M, EBITDA was $447M, net income was $186M, unlevered free cash flow was -$40.80M, and levered free cash flow was -$70.1M.
FLEX Quarterly Cash Flow (By Author)
When viewed on a quarterly basis, total equity still appears to be rising.
FLEX Quarterly Total Equity (By Author)
They were able to achieve far more attractive quarterly returns during 2021 and 2022 than they have in 2023. As of the most recent earnings report ROIC was 1.88%, ROCE was 1.55%, and ROE was 3.21%.
FLEX Quarterly Returns (By Author)
Valuation
As of October 19th, 2023, Flex had a market capitalization of $11.46B and traded for $24.76 per share. They do not pay a dividend, so using their forward P/E of 11.58x and their EPS Long-Term CAGR of 15.69%, I calculated a PEGY of 0.738x and an Inverted PEGY of 1.355x. This implies that fair value is currently around $33.55 per share.
FLEX Valuation (Seeking Alpha)
When viewing their valuation history over the last three years, the company is currently trading higher than the lows they have previously established.
FLEX 3-Year P/E (Seeking Alpha) FLEX 3-Year EV/EBIT (Seeking Alpha)
Risks
Flex has a business model which requires it to stay nimble and adaptable. If the company were to ever experience a capability gap and fall behind the expectations of either their primary customers or the consumers they serve, they could easily lose their loyal customer base.
Flex has spent many years cultivating relationships with other companies that are oriented toward technology and electronics. If they were to ever suffer a decline in reputation, not only might they risk losing their existing customers, they may have trouble finding new ones. They must perpetually take steps to ensure their customer base maintains a positive outlook on their efficacy and reliability.
With the yield cure inverted for months now, and the Fed still fighting inflation , I believe we are facing a recession. It is possible that macro factors affect their customer base enough that Flex experiences a period of diminished demand.
Catalysts
The company has a long-standing relationship with Enphase ((ENPH)), and supplies them with microinverters. They also control a significant interest in Nextracker. With the levelized cost of electricity already lower than any other energy source, Flex is well positioned to also experience sustained benefits from the shift toward a more renewable grid.
Levelized Cost Of Energy (Lazard, Dan Gearino, Insideclimatenews.org)
Their fairly steady annual buyback rate should help the company improve shareholder value. Over longer timeframes, the outsized effect of buybacks has the potential to cause significant improvements to their share price.
Conclusions
Overall, Flex appears to be well positioned in their niche. They currently serve a wide variety of customers and have exposure to the same strong tailwinds which are expected to benefit the entire photovoltaics industry. I believe the company is currently undervalued, but am giving it a Hold rating because it is unlikely to become an attractive long-term compounder. I would find them far more appealing if they were producing higher values for annual return on invested capital.
As the situation sits now, they are well worth keeping an eye on. This is a solid company in an in-demand industry. If an economic slowdown leads to a recession, then their valuation may drop enough that this company becomes attractive as a turnaround play. I will be sure to keep Flex on my watch lists, if their returns improve or their valuation drops, I may become a buyer.
For further details see:
Flex Has Made It Onto My Watchlist