Plexus Downgraded to Underperform

We remain apprehensive about Plexus Corp. (PLXS) meeting its 2011 targets and expect revenues to be down with difficult operating performance. Consequently, we downgrade the stock to Underperform from Neutral.

Plexus is a leading provider of electronic manufacturing services (EMS) to original equipment manufacturers (OEMs) in a wide range of industries, including wireline/networking, wireless infrastructure, industrial/commercial, defense/security/aerospace, and medical.

First Quarter Highlights

Plexus Corp. reported mixed first quarter 2011 results. While earnings per share (EPS) beat the Zacks Consensus Estimate by a penny, revenue missed the Consensus Estimate by 1.4%. The quarter’s EPS of 61 cents increased 56.4% from a year-ago quarter but fell 6.2% from the previous quarter.

Quarterly revenues came in at $565.8 million, an increase of 31.5% from $430.4 million in the year-ago quarter. Sequentially, revenues increased 2.0%.

Weak Outlook

Plexus reduced its outlook for the next two quarters of 2011 due to significant headwinds resulting from a slowdown in production for two unnamed customers, an increase in operating costs and a significant production delay for its customer, Coca-Cola Co. (KO). Plexus’ weak revenue outlook will weigh on the company’s results for 2011.

For the second quarter of 2011, EPS is expected in the range of 53 cents to 58 cents, excluding restructuring charges but including 8 cents in stock-based compensation expense. At the time when the company reported its earnings results, the Zacks Consensus Estimate for the second quarter showed a profit of 56 cents per share, in line with the company’s expectation.

Revenues for the second quarter are projected in the range of $540 million to $570 million, down 1.9% sequentially at the mid point. Revenues were below the Zacks Consensus Estimate of $576.0 million at the time of its first quarter earnings. Revenues are expected to be depressed due to the slow down of production for two significant customers that were acquired during the past year and an increase in operating costs.

Management expects third quarter 2011 revenues to be down sequentially. The major reason for the decline is the winding down of two manufacturing programs and a significant production delay in the two programs for The Coca-Cola Company. The delay in production for its customer Coca-Cola Co will lead to lower revenues in 2011.

For fiscal 2011, management anticipates that revenues would grow in the range of 10% to 13% from the 2010 level. This is below management’s target of annual revenue growth of 15% to 18%.

Estimates Reduced

The Zacks Consensus revenue and EPS estimates for fiscal 2011have been lowered by 5.3% and 10.9%, respectively, following the company’s soft outlook for 2011 provided during the first quarter 2011 earnings call.

The current Zacks Consensus Estimate for fiscal 2011 EPS is $2.21. All the seven analysts covering the stock have lowered their estimates for the year. Intense competition in the EMS market, small market share, continued component challenges and supply chain constraints pose threats to the stock.

Significant headwinds as a result of a slow down in production for two significant manufacturing customers that were acquired during 2010, an increase in operating costs and a significant production delay for its customer, the Coca-Cola Company, could lower profitably in the near term.

However, expansion of its global footprint, a healthy pipeline of program wins and improving end-market demand are long-term drivers of growth.

Plexus is currently a Zacks #5 Rank stock, implying a Strong Sell in the short term.

PLEXUS CORP (PLXS): Free Stock Analysis Report

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