Neutral on Plexus (PLXS)

A leading provider of electronic manufacturing services, Plexus Corp. (PLXS) exhibited incremental growth opportunities in the first nine months of 2010. Results were well above the Zacks Consensus Estimate.

We believe Plexus will remain well positioned for growth in 2011, based on new customer wins and improving end-market demand and contributions from the Coca-Cola (KO) win.

However, the weakening demand trends are reflected in its soft outlook for the fourth quarter of 2010. Revenue and earnings estimates have been lowered for the quarter. We therefore maintain our Neutral rating on the stock and lower the price target to $24.00.

Third Quarter Highlights

Plexus’ third quarter earnings beat the Zacks Consensus Estimate on the back of production ramps of manufacturing programs, operating leverage and robust sector performance. Earnings of 59 cents per share were above the Zacks Consensus Estimate of 57 cents per share.

Earnings per share (EPS) leaped 156.5% from year-ago quarter’s 23 cents. Sequentially, EPS escalated 16.0%. EPS came in line with management’s guidance of 54 cents to 60 cents per share.

Quarterly revenues came in at $536.4 million, an increase of 41.7% from $378.6 million in the year-ago quarter, attributable to new business wins and improving end-market demand. Sequentially, revenues upped 9%. Revenues were in line with the company’s guided range of $520 million to $545 million.


For the fourth quarter, earnings per share are expected to be in the range of 58 cents to 63 cents, excluding restructuring charges but including 6 cents per share in stock-based compensation expense. The mid-point of the guidance represents sequential and year-over-year growth rates of 2.0% and 59.0%, respectively.

Plexus expects a modest sequential revenue growth in the quarter. Revenues are anticipated in the range of $530 million to $555 million, up 1.1% sequentially and 38% year over year at the mid point, due to the ramp of new business.

New Pipeline

Growth at Plexus has traditionally been organic and not acquisition-based. The company has been successful at winning increased share with its existing customers and signing up new accounts with an average win rate of $159 million.

During fiscal 2009, the company generated approximately $650 million from bookings, a 20% increase from 2008 level. Of Plexus’ total revenue, 94% comes from customers worth greater than $5 million. We expect Plexus to drive its top line with large orders and customer wins in 2011.

Engineering agreements generate higher margins and are improving the company’s overall profitability. The company expects a 14% five-year CAGR from the engineering contracts. The company generated approximately $16 million in revenues in the third quarter from engineering bookings, of which 75% were related to the medical sector.

The company had also won 22 new manufacturing programs during the last quarter, which it believes will generate approximately $141 million in annualized revenues over the next few quarters, primarily affecting 2011 revenues.

Recommending ‘Neutral’

We expect strong revenues and earnings growth in 2011, due to a healthy pipeline of new program wins and expansion of its global footprint. Further, the Coca-Cola mechatronics (engineering agreement) win is expected to deliver incremental growth opportunities in 2011.

Near term, Plexus could witness some demand decline due to the weakness in the European market. Intense competition in the electronic manufacturing services market, small market share, continued component challenges and some supply chain constraints are other negatives.

Estimate Revision

Given the weak demand trends and soft fourth quarter outlook, over the past 30 days, 1 of the 8 analysts following the stock has lowered the earnings estimate for the fourth quarter of 2010. None of the analysts made an upward revision to their forecasts.

The current Zacks Consensus Estimate for the fourth quarter of 2010 is 60 cents per share, which is down 1 cent over the last 30 days.

We currently see an absence of catalysts that could drive the shares higher. Plexus is a Zacks #3 Rank stock, implying a ‘Hold’ rating over the short term.

PLEXUS CORP (PLXS): Free Stock Analysis Report

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