"Stellar" Acquisition by Flextronics

Flextronics International Ltd. (FLEX - Snapshot Report) is set to acquire Stellar Microelectronics, an Electronics Manufacturing Services (EMS) provider, with expectations of boosting some of its businesses. Though the financial terms of the deal were not disclosed, the company expects to complete the acquisition by the end of next month.

Through the acquisition of Stellar Microelectronics, Flextronics is expected to increase its offerings in the High Reliability Solutions business that comprises the medical, automotive, aerospace and defense businesses. Moreover, Flextronics will acquire certain certifications (AS9100C, ISO 9001:2008 and ISO13485:2003) that are needed to operate in the industry.

Stellar Microelectronics generates revenues of approximately $100 million on an annualized basis, which will likely boost Flextronics’ revenues going forward.

Flextronics’ Reliability Solutions business contributes 8% of the revenues and in the last concluded quarter this segment grew 22% year over year. Strong momentum in the medical and automotive space led to the double-digit growth in the segment. For the current quarter, Flextronics expects the segment to generate low-single-digit growth sequentially.

Flextronics remains focused on realigning its portfolio and is adopting aggressive measures (such as the exit from the ODM PC business) to boost its profitability over the long term. However, management expects some negative impact from this realignment in the near term.

We believe that Flextronics will face significant headwinds over the next couple of quarters due to macro-economic concerns, weak end-market demand and lingering problems related to the supply chain. Moreover, the portfolio realignment is also expected to hurt Flextronics’ top-line growth in the near term. Competition from Celestica Inc. (CLS - Snapshot Report) and Jabil Circuit Inc. (JBL - Analyst Report) are additional headwinds going forward.

However, we believe that demand is stabilizing in the traditional sectors (consumer electronics, computing, networking and communications), which will boost Flextronics’ top line going forward. Moreover, strong demand from emerging markets (automotive, medical, industrial) is also expected to drive growth going forward. Further, the portfolio realignment will likely boost profitability over the long term.

We have a Neutral recommendation on Flextronics over the long term. Currently, Flextronics has a Zacks #3 Rank, which implies a short-term Neutral rating (for the next 1-3 months).