Plexus Cut to Neutral

Plexus Corp. (PLXS - Analyst Report) is a leading provider of electronic manufacturing services (EMS) to original equipment manufacturers (OEMs) and serves customers of mid-to-low volume, higher margin and high growth segments of the EMS market. We recently downgraded the stock from Outperform to Neutral due to some inherent risks.

The company’s third-quarter results were in line with management’s guidance, with revenue exceeding the Zacks Consensus estimate. However, performance of all its sectors declined sequentially. The company’s fourth-quarter guidance was decent.

We believe that Plexus is among the best positioned in the industry. With a strong pipeline, new customer wins and increased cost-cutting measures, the company is poised for growth beyond 2009.

However, the contract manufacturing industry is highly competitive and margins have been low throughout the industry. Plexus is small player compared to peers, such as Flextronics International Ltd. (FLEX - Snapshot Report), Jabil Circuit (JBL - Analyst Report), Benchmark Electronics (BHE - Analyst Report) and Sanmina-SCI (SANMD).

Moreover, the company is currently dependent on few large customers for a large part of its revenue. Juniper Networks (JNPR) accounts for 23% of its total revenue. Given the competitive nature of the industry, the loss of any one of its key customers or individual projects with these customers would severely impact Plexus’ results.

Plexus is witnessing a relatively low level of demand volatility, perhaps indicating that the end markets are finally stabilizing. But we advise investors to remain cautious until we see some more tangible benefit from the stabilization in its legacy customer programs and stronger end-market recovery. Our six-month price target on Plexus is $26.