Electronics manufacturing services live a tough life. If you thought that Wal-Mart Stores (NYSE: WMT) and Dell (Nasdaq: DELL) make a living off razor-thin margins, you should see Flextronics (Nasdaq: FLEX) and friends. Here, I'll show you:
|
Company |
LTM Net Margin |
LTM Operating Margin |
LTM Gross Margin |
|---|---|---|---|
|
Wal-Mart |
3.3% |
5.8% |
25.2% |
|
Dell |
2.3% |
4.3% |
17.1% |
|
Flextronics |
1.2% |
2.2% |
5.6% |
|
Jabil Circuit (NYSE: JBL) |
1.5% |
2.8% |
7.6% |
|
Sanmina-SCI (Nasdaq: SANM) |
0.7% |
3.2% |
7.7% |
Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months.
Those other supposed tightwads aren't exactly roughing it by comparison to this sector. So if you run one of the electronics builders, the modus operandi is to pump massive amounts of business through the system while the secret to success lies in expanding those meager margins -- without scaring off customers to the plentiful competition.
Right now, Flextronics is aiming for operating margins in the 3.5% range. In the just-reported first quarter of fiscal year 2011, sales jumped 14% year over year (and believe me, that's considered a jump in this buttoned-down sector) to $6.6 billion. Operating margins ballooned from 0.17% to 2.65%, and net income more than doubled to $0.19 per share. Now imagine what the bottom line would look like if Flextronics could reach that dreamy 3.5% operating goal.
Unfortunately, it won't be easy. This industry is subject to the whims and vagaries of a wide variety of customers. Flextronics puts together office supplies for Xerox, servers for Dell, networking equipment for Alcatel-Lucent, just to name a few of the wildly divergent demands the company is under. When one or more of these customer markets is suffering under their own demons, Flextronics takes collateral damage.
On the other hand, when the clients are doing a little bit too good, like many of them are doing right now, Flextronics runs out of components. Shortages of silicone chips, raw materials, and basic electronic components all haunt the company today, despite running component manufacturing operations of its own. It just isn't enough. Flextronics lost about $200 million of business to shortages this time around and expects more of the same in coming quarters.
That elusive 3.5% target will remain a mirage until the supply chain issues work themselves out. I expect this stock and its peers to swoon some more until that day comes. Today is not the right time to buy this highly cyclical stock.
So I'm heading over to CAPS to give Flextronics a big, mean thumbs-down rating for the next few months. Follow along if you trust my All-Star Spidey sense -- or to cast the opposite vote if you don't.
