2023-05-03 03:16:09 ET
Summary
- Flex's quarterly earnings were strong and demonstrated strong growth going into 2023.
- Flex has been able to maintain performance with the broader market which displays its ability to effectively allocate resources and expand.
- Flex's recent acquisition of Anord Mardix will enable the company to diversify revenues and increase exposure to higher-margin segments.
- Assuming my DCF assumptions, Flex is currently undervalued resulting in a buy rating.
Flex ( FLEX ) has exemplified strong and consistent growth throughout the past few decades. With their recent FCF availability sparking acquisitions creating diversification along with an attractive valuation based on my DCF later in this article, I rate the stock a buy.
Business Overview
Flex Ltd. is a global technology and supply chain solutions company that provides a range of services including design, engineering, manufacturing, and logistics solutions. With operations in over 30 countries, the company has a diverse client base across industries such as automotive, healthcare, aerospace and defense, and emerging technologies. Flex is renowned for its focus on innovation, with a strong emphasis on digital transformation and investments in areas such as the Internet of Things, 5G, and artificial intelligence.
Company Website Overview
With a market capitalization of $9.337 billion, an 11% ROIC, a 52-week high of $25.12, and a low of $13.63, a price of $20.20 with an 11.67 P/E represents a price that may indicate potential value as discussed later in this article.
Flex has also bought back shares in the past years providing additional shareholder value. I believe that this is beneficial to the company's long-term strategy as they seem to be trading at a price that holds value enabling the company to capitalize on repurchasing cheap shares.
Seeking Alpha Flex Annual Shares Outstanding (Trading View)
Flex has exceeded market expectations with its recent earnings report, boasting a 3.86% beat in revenues ($7.8 billion vs $7.51 billion) and beating EPS estimates ($0.62 vs $0.60). This outstanding performance showcases the company's consistent excellence in the market. Moreover, Flex has provided optimistic 2023 guidance, anticipating revenues of $29.9 billion to $30.3 billion and adjusted EPS of $2.27 to $2.33. The company's positive outlook is attributed to its core business's strength and strategic acquisitions, which are expected to drive increased FCFs in the future. With this FCF they can employ their growing ROIC of 11% to expand the company's operations and achieve further synergies within their industry.
I believe that the upcoming earnings on May 10th will be in-line with expectations because although macroeconomic headwinds are potentially worse than expected, the company's resiliency and ability to deliver growth will hedge against this risk and allow the company to continue performance.
Keeping up with the Broader Market
Flex's ability to strengthen its core operations and expand through operations is exemplified by its performance which has maintained pace with the S&P 500 for the last 10 years. This demonstrates the company's long-term success and its ability to employ capital at relative effectiveness.
Flex Compared to S&P 500 10Y (Created by author using Bar Charts)
Strategic Acquisitions Fostering Growth
Flex has a strong track record of successfully integrating new acquisitions and internal innovations into its core business model. These enhancements have enabled the company to grow while improving its profit margins, resulting in an increase in FCF. This rise in FCF has provided the company with the flexibility to invest in new opportunities and leverage rapid technological advancements to its advantage.
One noteworthy acquisition was the purchase of Anord Mardix for $540 million in cash from private equity firm Bertram Capital. Anord Mardix is a global leader in critical power solutions, allowing Flex to expand its reach in the data center segment and attract new customers, thereby driving future cash flows. With projected 2021 revenue of $360 million and mid-teens EBITDA, Flex is expected to recover its FCF outflow for the acquisition and strengthen its financial position in the long term. I believe that these acquisitions will enable Flex to diversify its operations in the future and will allow them to be more resilient to market headwinds and expansionary growth periods due to its more defensive position. An increase in FCF from their sale of 17% stake in Nextracker ( NXT ) to TPG ( TPG ) displays a strong ability for Flex to continue such acquisitions and expansions which will expand the company's brand recognition and revenue streams.
Company Website
Analyst Consensus
According to analyst consensus, Flex is currently rated as a "strong buy". The stock has demonstrated consistent returns, with analysts projecting a share appreciation to $28.17, representing a 38.17% upside from current prices. With such an excellent 1Y upside potential, Flex seems to be a very attractive stock with strong future returns ahead.
Valuation
Before creating my assumptions and calculating my DCF, I will calculate the Cost of Equity and WACC for Flex using the Capital Asset Pricing Model. Factoring in a risk-free rate of 3.57%, I was able to conclude that the Cost of Equity was 8.1% as displayed below.
Created by author using Alpha Spread
Assuming this Cost of Equity value, I was able to calculate the WACC to be 6.72% as shown below, which is under the industry average of 11.68%.
Created by author using Alpha Spread
After conducting an Equity Model DCF analysis using FCFE, I have concluded that Flex is currently undervalued by 35% with a fair value estimated at approximately $31.16. This calculation involved using a discount rate of 8.1% over a 5-year period and projecting a low to mid-single-digit revenue growth rate beyond 2023. Moreover, my analysis factored in the company's ongoing innovation efforts and strategic asset acquisitions, which are expected to improve margins over time.
Equity Model DCF Using FCFE 5Y (Created by author using Alpha Spread) Capital Structure (Created by author using Alpha Spread)
Risks
Economic Conditions: Fluctuations in the global economy, including economic slowdowns, recessions, and currency fluctuations, can have an adverse effect on Flex's business and financial performance. This could impact Flex's ability to improve core segments of their business or venture into new growth areas due to strained FCF.
Supply Chain Disruptions: As a supply chain solutions provider, Flex relies heavily on its suppliers to deliver quality components and raw materials. Any disruptions to its supply chain, including natural disasters, geopolitical events, and pandemics, could impact the company's ability to deliver products to its clients.
Conclusion
In summary, I rate Flex as a buy due to its robust capacity to expand its core operations while simultaneously venturing into new markets, coupled with its appealing valuation. This is because the company offers strong growth potential at a value price that is difficult to pass upon.
For further details see:
Flex Ltd: Robust Growth Potential At A Discounted Valuation