We are upgrading our recommendation on
) from Underperform to Neutral. In the recently concluded first
quarter, Plexus reported mixed results, where the company's bottom
line beat the Zacks Consensus Estimate by 3 cents though the top
line lagged the revenue estimate of $532.0 million.
Plexus has been witnessing a healthy pipeline of program wins
coupled with global expansion and improving end-market demand.
During the first quarter, Plexus won 28 new programs in the
manufacturing solutions group, which are expected to generate
approximately $203.0 million in annualized revenue when production
As an engineering-focused EMS (Electronic Manufacturing
Services) player, Plexus is well positioned to benefit from the
increasing outsourcing trend among the Medical, and Industrial and
Defense/Aerospace OEMs (Original Equipment Manufacturer). Plexus
has been able to achieve strong organic growth from these two
sectors, as Industrial & Commercial showcased an increase of
600 basis points in fiscal 2011 as a percentage of total
Medical also grew significantly as a percentage of sales, up 100
basis points in fiscal 2011. We believe that significant new
business wins in these two sectors (58.0% of $203.0 million) will
continue to drive revenue growth going forward.
Moreover, the recently concluded Kontron deal will also boost
revenue from the Industrial & Commercial sector going forward.
We believe that strength in these two sectors will also drive
top-line growth over the long term.
Additionally, Engineering agreements generate higher margins and
help improve the company's overall profitability. The partnership
The Coca-Cola Company
) is expected to deliver incremental revenues and represents a
significant deal win for the company.
Plexus has also been expanding its manufacturing footprint in
low-cost regions, establishing its presence in Mexico, Malaysia and
China. During the first half of fiscal 2012, Plexus expects to
announce the construction of a larger facility in Oradea, Romania
to replace the leased buildings. We believe that Plexus' policy of
shifting production from higher-cost to lower-cost regions will
boost profitability going forward.
However, the EMS industry is expected to grow at a sluggish rate
over the next several years, primarily because it is a mature
segment that is being fed by a progressively lower number of
outsourcing opportunities. According to data from market research
firm IHS, the global EMS Industry grew approximately 10.1% to
$206.8 billion in fiscal 2011.
However, the outlook for 2012 is flat and the research firm
expects the industry to grow at single-digit rate through 2015. The
industry is primarily hampered by overcrowding in consumer
electronics (computer, communications and consumer) market, which
remains a concern for a small player such as Plexus, going
Additionally, Plexus' significant exposure to the slowing
Networking and Communications industry remains a concern for us.
The company also faces foreign currency fluctuation risks, as more
than 45.0% of the revenue comes from international operations.
Another weak point for Plexus is the customer concentration.
Plexus depends on a few large customers for a major part of its
revenues. Given the competitive nature of the industry, the loss of
any one of its key customers, or individual projects with these
customers would severely impact Plexus results going forward.
Plexus has been plagued by supply chain constrains due to
natural disasters in Japan and Thailand during fiscal 2011.
Moreover, due to the lack of long-term supply agreements, these
shortages are expected to continue in fiscal 2012.
Raw material and component part supply shortages and delays in
deliveries can also result in higher rates. Rising raw material
prices and reduced consumer spending could negatively affect sales
and profitability going forward.
We believe that stabilizing end markets, new business
opportunities, particularly in the industrial/commercial and
medical sector and global expansion will drive growth over the long
term. We also believe that a gradual improvement in the overall
U.S. market will boost Plexus' top line going forward.
Currently, Plexus has a Zacks #3 Rank, which implies a Hold
rating in the short term.
COCA COLA CO (
): Free Stock Analysis Report
PLEXUS CORP (
): Free Stock Analysis Report
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