Neutral Stance on Plexus (PLXS)

At the 2010 investor day, Plexus Corp. (PLXS) reaffirmed its outlook for the third quarter of fiscal 2010, given during the second quarter conference call.

Management expects earnings per share to be in the range of 54 to 60 cents, excluding restructuring charges but including 6 cents per share in stock-based compensation expense. This is more than double of 23 cents per share reported in the year-ago period.

Plexus anticipates revenues in the range of $520 to $545 million, up 8.5% quarter over quarter at the mid point, attributable to the ramp up of new business and improving end-market demand. The guidance represents sequential and year-over-year revenue growth rates of 37% and 44%, respectively.

Earnings Estimate Revisions

Estimates have declined over the last 30 days, reflecting the analysts’ pessimism regarding the stock, due to the company’s lack of near-term growth drivers.

There is a strong agreement among analysts regarding the outlook of Plexus earnings. Over the last 30 days, 3 of the 8 analysts covering the stock have made a downward revision to their estimates for the third quarter and fiscal year 2010.

Earnings estimates for fiscal year 2010 have been lowered by 1 cent from $2.12 to $2.11 in the last 30 days and last week. However, for the upcoming quarter, there was no estimate revision, thus the analysts expect the company to post in line results. The current Zacks Consensus Estimate for the third quarter of 2010 is 58 cents, in line with the company’s guidance.

Second Quarter Earnings

Plexus reported second quarter 2010 earnings of 51 cents per share, beating the Zacks Consensus Estimate of 49 cents per share, but in line with management’s guidance of 44 to 52 cents per share. Earnings per share were a huge increase from 28 cents in the year-ago quarter. This increase was attributable to revenue growth in each of the sectors, given the improving end-market demand and new business wins.

Revenues for the quarter came in at $491 million, an increase of 26.2% from $388.9 million in the year-ago quarter due to new business wins. Revenues were in line with the company’s guided range of $470 to $495 million.

Sector performance was robust, as the company experienced sequential revenue growth in each of its sectors, leading to better-than-expected results for the quarter. The company experienced growth in all of its market sectors, both as a consequence of improving end-market conditions and production ramps of manufacturing programs won over the past few quarters. However, management did face some supply chain constraints in the quarter.

Remain Neutral

Despite the downward estimate revision by the analysts, we have a short-term Neutral recommendation on Plexus (Zacks #3 Rank). We also maintain our long-term recommendation of Neutral on the stock. We expect strong revenues and earnings growth in the second half of 2010 and 2011 on the back of strong cash position, healthy pipeline of new program wins and expansion of the company’s global foot print.

Over the long term, Plexus will benefit from the growing need for Medical, Wireline and Wireless infrastructure, Industrial and Commercial businesses globally. Further, the Coca-Cola (KO) win is expected to deliver incremental growth opportunities in 2011.

However, Plexus could witness some demand decline due to the weakness in the European market. Intense competition from Flextronics International Ltd. (FLEX), Sanmina-SCI (SANM), Benchmark Electronics (BHE) and Jabil Circuit (JBL) in the EMS market, small market share, continued component challenges and some supply chain constraints concerns us.

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