A Look at Why RBC Capital Markets Lowered their Price Target on Flextronics International Ltd.(NASDAQ:FLEX) to $13 from $14.

On October 4 Equity Analysts Amit Daryanani, CFA, Mitch Steves and Associates Irvin Liu and Jeriel Ong of RBC Capital Markets Equity Research Lowered their Price Target on Flextronics International Ltd.(NASDAQ:FLEX) to $13 from $14. and Issued a report titled ”Adjusting Estimates To Reflect Challenging Macro In H2:15.”

According to the report ”We are adjusting our estimates lower on FLEX to reflect multiple headwinds that we think will curtail revenue expectations in H2:15, though we think margins, EPS and FCF impact should be minimal. In addition, we see several “self-help” levers starting to build that should enable double digit EPS growth in CY16 – (A) Mirror Controls contribution, (B) NexTracker benefit, (C) Margin expansion within IEI & (D) HRS organic growth given bookings ramp. Near-term, we see headwind stemming from – (1) Lenovo challenges given disappointing data in China & Brazil, (2) muted growth environment in printer, (3) lack of demand recovery within INS segment and (4) generally aggressive Street estimates at 8% q/ q growth for the Dec-qtr. While we see a reasonable revenue headwind ($100-150M/quarter), we suspect the EPS impact will be more muted. Maintain OP and reduce our PT to $13 (prior $14).

Flextronics International Ltd.(NASDAQ:FLEX) is a leading sketch-to-scale™ solutions company that designs and builds intelligent products for a connected world. With approximately 200,000 professionals across 30 countries and a promise to help the world Live smarter™, the company provides innovative design, engineering, manufacturing, real-time supply chain insight and logistics services to companies of all sizes in various industries and end-markets.

On October 2 FLEX announced the grand opening of its new medical device manufacturing facility and Center of Excellence in Tijuana, Mexico, dedicated to the innovative development and manufacturing of medical devices.

Located ten minutes from San Diego, California, the new Flex medical facility will serve as the showcase location for Flex medical operations, employing 2,400 workers and spanning over 530,000 square feet. Devices produced at this facility for Flex’s OEM customers will help to diagnose and treat a wide variety of medical conditions, ranging from cardiovascular diseases and diabetes, to hearing impairment, neurological diseases and skin ailments.

The report continues ”We believe the company is positioned to surprise on the upside with regard to operating margins as they stabilize above 3%+ over the next 4–6 quarters, causing EPS to see meaningful expansion. With the current macroeconomic backdrop and an improvement in margins on the horizon, we believe the stock should see multiples expand.

The Upside scenario: In this scenario, we assume the macroeconomic environment improves in a meaningful way and the company sees revenue leverage from historically low-margin product lines such as the CTG segment. In addition, a stronger uptake in telecom capex spending would favorably impact the company’s Integrated Network Solutions segment. In this scenario, robust demand for tablets continues and gaming consoles see an uptake in demand. Our upside scenario value is $16.

Equity Analysts Amit Daryanani, CFA, Mitch Steves and Associates Irvin Liu and Jeriel Ong concluded that ”We are Outperform rated and have a $13 price target on FLEX. Looking at valuations across a cycle, we believe EMS companies trade at a median of 10x NTM PE excluding valuation leader PLXS. Our price target applies an ~12x NTM P/E multiple, as the company is seeing material revenue ramps and we believe that it could achieve 3%+ margins by FY16E.

Price target impediments involve the level of end-market demand, pricing, the pace of new product introductions, and the ability to generate free cash flow, lower production costs, and identify and integrate attractive acquisition candidates.


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