Earnings Preview: Flextronics

Flextronics International Ltd ( FLEX - Snapshot Report ) is set to release its fiscal second quarter 2013 results after the closing bell on October 18, 2012. Flextronics has posted an average earnings surprise of 3.18% over the past four quarters. We don’t expect a major change in the earnings trend pattern for the current quarter.

Prior Quarter Recap

Flextronics’ first quarter revenue was down 20% year over year to $5.99 billion and missed the Zacks Consensus Estimate of $6.07 billion. The year-over-year decline was primarily due to transition of business model toward low-volume high-margin business. The reported revenue was slightly above the lower end of management’s guidance range of $5.9 billion–$6.3 billion.

However, the bottom line for the company expanded 5% on a year-over-year basis to 21 cents driven by modest margin expansions. Reported earnings also beat the Zacks Consensus Estimate by a penny.

For the forthcoming quarter, management expects earnings per share in the range of 21 cents to 25 cents. Total revenue is expected in the range of $5.9 billion to $6.3 billion. The Zacks Consensus Revenue Estimate for the second quarter is $6.19 billion.

Estimate Revision Trend

In the last 30 days, none of the six analysts covering the stock revised their estimates for the second quarter. Thus, the Zacks Consensus Estimate for the quarter remained at 22 cents per share.

Analysts covering the stock expect the company to report an in-line quarter. Analysts are positive on the margin expansions and expect the phenomenon to continue in the near term. Moreover, strong bookings would also act as a positive catalyst for Flextronics. However, analysts believe that the overall sluggish macroeconomic environment may hamper the revenue growth.

Recommendation

We believe that demand is stabilizing in the traditional sectors (consumer electronics, computing, networking and communications) and the company is experiencing strong demand from the emerging markets (automotive, medical, industrial). Further, the portfolio realignment will likely boost profitability over the long term.

However, we believe that Flextronics will face significant headwinds over the next couple of quarters due to macroeconomic concerns, weak end-market demand and continuing supply chain related problems. Increasing competition from Jabil Circuit Inc. ( JBL - Analyst Report ) remains a concern. Moreover, the portfolio realignment is also expected to hurt Flextronics’ top-line growth in the near term.

We have a Neutral recommendation on Flextronics over the long term. Currently, Flextronics has a Zacks #4 Rank, which implies a short-term ‘Sell’ rating (for the next 1-3 months).