Google, Lenovo Group Limited, and Microsoft Can Take Flextronics to New Highs

Contract-electronics manufacturer Flextronics International (NASDAQ: FLEX  )  is on a roll this year. The stock has already gained more than 44%, beating the broader market. Flextronics has benefited from its supplier relationship with Google's (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) Motorola unit, and now that the search giant is selling its smartphone business to Lenovo (NASDAQOTH: LNVGY  ) , things can get even better.

A favorable deal
Motorola is a 10%-plus customer of Flextronics, and once the company is acquired by Lenovo, the likes of Moto X will probably be pushed more aggressively into the Chinese market and other emerging regions. 

As pointed out by Engadget earlier this year, Flextronics is a contractor to both Lenovo and Motorola. It has the expertise of building customized flagship handsets on a short notice, and this is what Lenovo is looking for. As Lenovo will go for mass production of Motorola's smartphones going forward, there's a good chance that Flextronics' order book will improve. 

Motorola will continue manufacturing the Moto X in cost-effective regions such as Brazil and China, and the good news is that Flextronics has facilities in both these countries. Moreover, Flextronics already has close ties with Lenovo, and this suggests that Google's sale of Motorola to Lenovo might actually be a good thing for the contract-electronics manufacturer.

More reasons why Lenovo could be a growth driver
Flextronics received the "Supplier Quality of the Year" award from Lenovo last year. Moreover, Lenovo has been investing aggressively in Brazil, as evidenced by its acquisition of three consumer electronics companies for $147 million a couple of years ago. According to GfK, smartphone shipments are expected to jump 75% in Brazil in 2014, indicating that both Lenovo and Flextronics can benefit from this market.

In China, Lenovo is No. 2 in smartphones. Again, this is great news for Flextronics as the Chinese smartphone market will grow in leaps and bounds in the next few years, propelled by its LTE roll-out. Moreover, since Lenovo will bring an iconic -- and well-priced -- brand in the form of Motorola to the Chinese consumer, it should be able to woo more customers.

Lenovo's global ambitions are quite interesting as well. It aims to become the third-largest smartphone company globally, shipping 100 million smartphones in 2015. As such, Flextronics should ideally receive higher smartphone assembly orders from Lenovo as the Chinese company embarks on its world domination spree.

Other catalysts
Apart from the smartphone market, Flextronics has a number of other important customers. For example, it has strengthened its relationship with Google. It makes the Chromecast device for the search giant, which has already sold in the "millions" and could find its way into more countries across the globe.

Flextronics and Google are also working on other programs. On the third-quarter conference call, Flextronics management said that Google is on track to become a top-ten customer in terms of percentage of revenue. 

Flextronics also makes the Xbox console for Microsoft (NASDAQ: MSFT  ) . The new console cycle has started off well, with sales of the PS4 and the Xbox One in the first six months outpacing their predecessors.

By the end of this year, it is expected that Microsoft will ship around 9 million Xbox Ones, and since the new console cycle has just started, there is still a lot of runway for Microsoft to grow sales of the device. As such, Flextronics should continue seeing strong demand from Microsoft going forward.

Final words
All in all, Flextronics is primed to benefit from consoles and smartphones -- two key trends in consumer electronics. As far as the company's financial performance and fundamentals are concerned, it doesn't disappoint. In the last-reported fourth quarter, Flextronics' revenue rose 27% year over year. Its net income was $43 million, up from a loss of almost $50 million in the year-ago quarter.  

Moreover, the stock is cheap at just under 10 times forward earnings. As such, Flextronics looks like a solid investment regardless of how you're looking at it.

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10/23/2014 11:57 AM
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