Flex Ltd.: Nextracker IPO and Enphase Partnership Are Positive Catalysts (NASDAQ:FLEX)

Various photography

Earlier this month, President Biden visited South Carolina and announced a $60 million investment by Enphase Energy (ENPH) to manufacture the company’s microverters – currently manufactured in China, India and Mexico – here in America. Enphase’s partner on the project is Singapore-based Flex Ltd. (NASDAQ:FLEX) – a global supply chain manufacturing giant that will actually manufacture the finished product. Indeed, on July 5th, Enphase announced Deliveries began from Columbia, SC – initial production was at a US manufacturing site. This is a positive catalyst for To bend go forward. This also applies to the recent and very successful IPO spin-off of To bend‘s networker (NXT) segment. Additionally, To bend is arguably undervalued at a forward P/E of just 11.4x after revenue rose 16.5% year over year in FY23.

investment thesis

To bend is a leading global provider of electronic manufacturing (“EMS”) contract supply chain services to original equipment manufacturers (OEMs). a variety of sectors such as consumer appliances, automotive (e.g. electric vehicles) and industrial.

To bend has more than 100 production sites in 30 countries on four continents. The Company provides services such as printed circuit board (“PCB”) fabrication, system fabrication and assembly, logistics and other design and engineering services in support of OEMs. In general, FLEX is likely to be a key beneficiary of the trend towards onshore supply chain manufacturing in the US (as in the Enphase example mentioned above).

In FY23, FLEX grew revenue 16.5% year over year and delivered a 20.4% increase in non-GAAP EPS from $2.36, thanks to increasing efficiencies. Still, the stock closed Friday at an expected P/E of just 11.4x. As shown below, the stock has almost doubled in the past year, but I think it has more potential ahead due to its relatively low valuation compared to its growth potential:

Data from YCharts

merits

FLEX’s FY4’23 EPS report was released on May 10th and was another strong result:

• Revenue of $7.48 billion (+9.2% YoY) was exceeded by $300 million.
• Non-GAAP EPS of $0.57 was up $0.06.
• Adjusted free cash flow for FY23 was $335 million.

As can be seen in the slide below (from the Q4 presentation), To bend posted fourth-quarter revenue growth in all three segments, while adjusted operating margin was 4.9% (+60 basis points year-on-year) and adjusted operating income of $364 million increased 23% year-on-year:

TO BEND

In the fourth-quarter earnings call, CEO Revathi Advaithi pointed out:

Looking at full year results, FY23 was very strong despite the ongoing challenges in the macroeconomic landscape. We grew revenue 17% year over year with adjusted operating margin for the full year of 4.8%. And we had adjusted earnings per share of $2.36, up 20%. This is the third year in a row that earnings per share have increased by at least 20%..

As I mentioned earlier, such proven EPS growth seems to reach significantly higher valuation levels To bendThe current forward P/E is only 11.4x.

Nextracker IPO

During the quarter (in February), FLEX completed the IPO of its solar-based Nextracker (NXT) segment, which arguably was a big hit despite a relatively difficult IPO environment:

Data from YCharts

Nextracker’s technology optimizes the performance of solar power plants by enabling solar panels to accurately track the sun’s path across the sky to maximize total power generation.

To bendNextracker’s strategy for the IPO is for Nextracker to better thrive as a standalone company while retaining a significant interest in the company. As mentioned in the chart above, NXT was the smallest segment within To bend, but also grew the fastest (sales +31% yoy). In the most recent SEC-10-K filing, Flex reported that “Following the closing of the IPO, Flex owned 61.4% of the total outstanding shares of Nextracker’s common stock.”

On the aforementioned conference call, FLEX also reported that it reduced its debt by more than $300 million in FY23 and transferred $150 million of debt to Nextracker as part of its IPO. FLEX ended the quarter with cash on hand of $3.3 billion, or an estimated $7.19 per share, based on an average of 459 million shares outstanding.

Go forward: microinverter and forecast for fiscal year 24

The development of the Enphase microinverter was not mentioned in the fourth-quarter earnings call. However, as mentioned above, the microinverters have since gone into production earlier this month. With that in mind, I expect FLEX to provide some color commentary on the partnership on its fiscal 2024 first quarter conference call scheduled for July 26.

That said, it’s clear that microinverters have been the key growth catalyst for Enphase for years and should remain so as solar capacity build-out accelerates in the US (and globally):

RRP

The mean value of the FLEX forecast for fiscal year 24 is now as follows:

• Revenue of $31 billion.
• Adjusted non-GAAP EPS of $2.45/share.

That may not compare to FY23 results (ie, revenue of $30.3 billion and non-GAAP EPS of $2.36) that’s all that impressive, unless you consider that the forecast isn’t a contributor from the split-off Netracker segment. Note, however, that NXT’s current market cap is $6.2 billion To bend had a stake of 61.4% immediately after the IPO.

Competition

FLEX’s main competitor is Jabil (JBL), a leading EMS service provider, which I believe is also significantly undervalued relative to its growth rate. In fact, both companies have significantly outperformed the broad market represented by the Vanguard S&P500 ETF (VOO) and the Invesco Nasdaq-100 Trust (QQQ):

Data from YCharts

The following table compares the two companies based on a number of valuation metrics:

	TTM sales	TTM EPS	TTM FCF/Share	Forward P/E	shares Terrific
TO BEND	$30.35 billion	$1.72	$0.73/share	11.4x	459 million
JBL	$35.3 billion	$7.12	$7.55/share	13.1x	136.4 million

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Jabil benefits from a relatively small number of shares, a strong share buyback program, and continued margin expansion. Note that the stock is up over 40% since I published my Seeking Alpha analysis, “Jabil: Treat Yourself And Buy the 10% Dip,” on April 24th.

Summary and Conclusion

I look at To bend (and also Jabil…) in a very attractive position given growth in the sub-sectors that need their supply chain and EMS capabilities and service support: Electric Vehicles, Mobile Consumer Devices, Renewable Energy, Cloud Infrastructure and Data Center/Communications Infrastructure – to name just a few. Both companies also appear to be significantly undervalued compared to their proven growth rates. The recent announcement that the Enphase Microinvestors are starting production (manufactured by To bend) is a positive catalyst going forward, as is the very successful NXT IPO. FLEX stock is a BUY.