Flextronics International (FLEX) came up with a weak outlook last quarter. The company was struggling before it released its financial results for the quarter, and this caught investors' attention. Being a manufacturing partner of Google for the Moto X and Microsoft for the Xbox One, investors were surprised by a weak outlook from Flextronics.
Despite good results, the stock has declined 20% in the last three months. The reason behind this decline can be attributed to near time pressures arising as a result of the broader demand environment. Further, Flextronics is expecting this weakness to continue for some time.
However, management is confident of delivering outstanding results, and is also optimistic that the company is well-positioned to deliver in the long run. So, should investors bet on a turnaround at Flextronics?
Not a pretty picture
Flextronics is struggling at present. It failed to clock good numbers last quarter. Though Flextronics' quarterly revenue grew by 3.8%, it failed to maintain a strong bottom line, and as a result, net income declined 21% on a year-over-year basis.
The results were impacted by operational inefficiencies. Higher start-up costs associated with its new program ramp ups hurt the company’s profit margins. The company is also seeing weakness in its end markets, and is expecting its business segment slide in the single digits in the ongoing quarter.
Flextronics is facing weakness in several segments such as networking, industrial, and the high-reliability solutions businesses. Also, weakness in telecom, semiconductor equipment sales, and the medical devices market are dragging Flextronics down, which will offset the robust growth that the company is seeing in high voltage solutions.
A key partnership
However, high velocity solutions might save Flextronics to some extent. The performance of this segment in the past has been outstanding, with 36% growth in the revenue seen last quarter on a sequential basis. Flextronics is expecting this segment to further grow, around 20%, in this quarter with the majority of its revenue coming from its partnership with Google.
Google is showing positive signs of sticking with Flextronics as its manufacturing partner. Moreover, Motorola management stated that Flextronics is capable of assembling “tens of millions” of phones a year, if needed. This statement was justified when Motorola once again chose Flextronics to manufacture the lower cost Moto G.
Jabil Circuit: A better buy
However, Flextronics is facing stiff competition from Jabil Circuit, which is a manufacturing partner of Apple. Jabil has been manufacturing aluminum casings for the iPhone, and with the growing sales of Apple’s iPhone, Jabil is also seeing a great improvement in its results. Apple contributed 20% to Jabil’s top line last quarter. So, Jabil has a high-volume smartphone player on its client list, and is way cheaper than Flextronics.
Jabil’s P/E ratio of 11 is less than half of Flextronics’. In addition, Jabil also has a dividend yield of 1.60%, while Flextronics does not. So, investors will surely look for the better pick and Jabil suits them best as of now as it is having some good catalysts ahead of it.
Also, Flextronics’ valuation is upsetting. The company is struggling and is facing weakness, which might continue in the future as well. Also, it isn’t showing any signs of improvement.
It cannot be denied that Flextronics is making some good moves -- such as its Google partnership and the recent acquisition of RIWISA, which provides automated precision plastic solutions for the medical industry. Flextronics has also improved its standing at Google and is manufacturing the Chromecast devices. In addition, Flextronics is reported to be manufacturing 90% of the Xbox One units.
But then, Flextronics doesn’t seem a promising investment as of now. So, investors should wait for the company to gain market share, as presently its valuation doesn’t justify its financial performance.