I think there's a trend here.
Electronics manufacturing service Flextronics International (Nasdaq: FLEX) just beat expectations for its third quarter and raised guidance for the fourth. So far, it's simply good news. What makes it a trend is the way sector rivals Jabil Circuit (NYSE: JBL), TTM Technologies (Nasdaq: TTMI), and Sanmina-SCI (Nasdaq: SANM) set the stage for Flextronics: We now have four major circuit-board makers and manufacturing specialists all reporting the same strong demand for their products and services.
Those stocks I just mentioned all made another little jump in today's early trading, presumably thanks to the very demand trend I just described. The stocks have fallen throughout the day, which shouldn’t be read into too much; the group has been on a tear in recent months, and Flextronic is still up more than 30% since late October.
Flextronics reported 19% stronger sales and 47% higher non-GAAP earnings, both year-over-year. The company's return on invested capital (ROIC) stands at a record 33.6%. And it's all thanks to an "overall healthy business environment" with particular strength in the mobile and automotive products segments.
The mobile boost was mainly a seasonal phenomenon and will fall back again now that the holidays are over. But the overall high demand for electronics is not likely to go away anytime soon, as long as you allow for some seasonal adjustments.
All that said, I'm not sure that Flextronics stands out as a particularly promising investment amongst its peers. The business model runs on thin margins even for this tight-belted industry, because the company aims for high sales volume. The more margin-minded TTM Technologies always struck me as a safer investment because the greater margin of safety around the bottom line shields the company from short-term disasters.
Flextronics is a giant in its industry and surely large enough to withstand a few storms of its own, but then I'd like to see the company take better advantage of salad days like these. The net margin did improve over the year-ago quarter but remained a very modest 2.4%. Even notoriously low-margin Jabil Circuit did better than that in its comparable report.
Add Flextronics to your Foolish watchlist. Maybe you'll find more to cheer about in coming quarters.
