Earnings Preview: Plexus Corp.

Electronic Manufacturing Services provider Plexus Corp. ( PLXS - Analyst Report ) is scheduled to report its first quarter 2012 results on January 18, 2012, after the market closes. In the run-up to the earnings report, we witness no major variations in the consensus estimates.

We note that on an average, Plexus has posted an earnings surprise of 4.61% in the trailing four quarters, implying that it has outdone the Zacks Consensus Estimate by the same magnitude over the period.

We do not expect a major change in the earnings trend for the current quarter. We believe that strong new business wins and recovering end-market demand will drive growth in the upcoming quarter.

Prior Quarter Recap

Plexus reported a mixed fourth quarter with revenues of $538.1 million, which missed the Zacks Consensus Estimate of $540.0 million. However, earnings per share (EPS) came in at 52 cents, surpassing the Zacks Consensus Estimate of 50 cents, based on strong year-over-year revenue growth.

For further details please see Plexus Reports Mixed 4Q.

Current Quarter Outlook

Plexus recently revised its first quarter guidance. The company now expects revenue in the range of $525.0-$530.0 million (earlier guidance was $510.0 million to $540.0 million), based on approximately $200.0 million worth of new program wins. The EPS is expected to be in the range of 48 cents to 50 cents (earlier guidance was 44 cents to 49 cents) for the first quarter.

Estimate Revision Trend

Currently, the Zacks Consensus Estimate is pegged at 47 cents for the first quarter, a decrease of 21.7% from 60 cents reported in the year-ago quarter. This is based on an estimated revenue decline of 6.4% to $532.0 million.

In the last 30 days, two of the nine analysts covering the stock raised their estimates for the first quarter. Similarly, four analysts raised their estimates for fiscal 2012, while one analyst lowered the estimate for the same period.

Our Recommendation

We believe that global expansion, a healthy pipeline of program wins and improving end-market demand will drive growth over the long term. We note that a faster ramp up of the freestyle soda machines at Burger Kings and other locations (such as McDonald’s and Wendy’s) will provide a significant revenue stream for Plexus over the long term.

Freestyle is a fountain drink dispenser, with a touch LCD front screen that provides consumers with more than 100 choices of soda and beverages. The dispenser has been built in partnership with The Coca-Cola Co. ( KO - Analyst Report ) and is currently being rolled out in approximately 850 Burger Kings stores.

Most recently, Plexus entered into an asset-based transaction with Germany-based Kontron AG. Under the terms of the agreement, Plexus will buy certain assets of Kontron Design Manufacturing Services (KDMS), a wholly owned subsidiary of Kontron AG, in Penang, Malaysia, for approximately $30.0 - $35.0 million.

The transaction is expected to add incremental revenues of $50 - $75 million for Plexus based on specified volumes from Kontron and is expected to be modestly accretive to its earnings in 2012.

We believe that engineering agreements generate higher margins and are generally incremental to the company’s overall profitability. We believe that the Kontron agreement will boost Plexus’s growth in the industrial/commercial sector going forward. For further details please see Plexus Strikes Deal with Kontron.

Nonetheless, lack of visibility in customer growth and macroeconomic concerns remain the primary headwinds for the forthcoming quarters. Plexus is expanding its manufacturing facilities in Malaysia and Romania, which will also hurt its profitability in the near term. Moreover, intense competition, continued component challenges and supply chain constraints are the major concerns over the long term.

We have an Underperform recommendation on Plexus for the long term (6-12 months). Currently, Plexus has a Zacks #3 Rank, which implies a Hold rating for the short term.