Plexus Corp. (
recently announced an asset-based transaction with Germany-based
Kontron AG, a leading provider of embedded computer technology.
Under the terms of the agreement, Plexus will buy certain assets of
Kontron Design Manufacturing Services (KDMS), a wholly owned
subsidiary of Kontron AG, in Penang, Malaysia, for approximately
$30.0 - $35.0 million.
Kontron will shift all manufacturing units of KDMS to Plexus'
Penang facilities. In exchange, Kontron is expected to contribute
approximately $100.0 million of incremental revenue annually for
two years. The transaction is expected to be completed by the next
The transaction will further expand Plexus' operations in the
low-cost regions of the Asia-Pacific. However, we believe that the
transaction will be much more beneficial for Kontron in the near
term, as it will allow the German company to focus on its core
business. The transaction is also expected to boost Kontron's
working capital and earnings per share for 2012.
Plexus expects the transaction to be beneficial over the long
term. The transaction is expected to add incremental revenues of
$50 - $75 million for Plexus based on specified volumes from
Kontron, and is expected to be modestly accretive to its earnings
in 2012. However, Kontron's significant exposure to Europe will be
a concern for Plexus going forward.
We believe that engineering agreements generate higher margins
and are generally incremental to the company's overall
profitability. We believe that the manufacturing agreement will
boost Plexus's growth in the industrial/commercial sector. In
fiscal 2011, the industrial/commercial sector was the second
largest contributor to Plexus's top-line growth. We believe that
the agreement with Kontron will boost Plexus's top-line and
bottom-line growth going forward.
Plexus has also been expanding its footprint in low cost regions
and has already established its presence in Mexico, the U.K.,
Malaysia and China. In fiscal 2011, Plexus commenced construction
in Xiamen, China, which is expected to be completed during the
second half of fiscal 2012. The company also began construction of
an additional manufacturing facility in Penang, Malaysia during
early fiscal 2011 and anticipates completing the facility in the
first quarter of fiscal 2012.
During the first half of fiscal 2012, Plexus anticipates
announcing the construction of a larger facility in Oradea, Romania
to replace the leased buildings. Plexus plans a total area of
approximately 3.5 million square feet in 2014 compared with 2.8
million square feet in 2011. We believe that increasing capacity
will boost margins over the long term.
Plexus narrowed down its first quarter guidance and now expects
revenue in the range of $525.0-$530.0 million (earlier guidance was
$510.0 million to $540.0 million) based on approximately $200.0
million worth of new program wins. Earnings per share are now
expected in the range of 48 cents to 50 cents (earlier guidance was
44 cents to 49 cents).
We maintain our Underperform recommendation on Plexus over the
long term. The company continues to face cut-throat competition in
the EMS market from
Flextronics Inc. (
, where component shortages and supply chain constraints are
increasing operational complexities. Moreover, Plexus
continues to invest in new sites and increasing headcount that may
affect profitability in the near term.
Currently, Plexus has a Zacks #3 Rank, which implies a Hold
rating in the near term.
FLEXTRONIC INTL (
): Free Stock Analysis Report
PLEXUS CORP (
): Free Stock Analysis Report
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