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Electronic product manufacturer Flextronics International Ltd. recently announced the acquisition of Rochester Hills, Michigan based Saturn Electronics & Engineering Inc. for an undisclosed amount.

Saturn is a well-known supplier of electronic manufacturing services, solenoids and wiring to the automotive, appliance, consumer, energy and industrial markets. Saturn’s operations are spread over a number of locations that include Coopersville, Michigan, Mexico, the Philippines and China.

Saturn reported revenue of more than $300.0 million in the most recent fiscal year. More than 70% of the company’s revenue comes from the automotive sector.

Flextonics has a decent penetration in the automotive market where it supplies products and services for lighting, interior, power electronics and connectivity.

We believe that the acquisition will further boost Flextronics access into the automotive market going forward. Moreover, Saturn’s existing units in the low cost areas of Asia-Pacific and China will expand Flextronics manufacturing capacity and profitability over the long term.

Acquisitions have been an integral part of Flextronics growth story. Over the last three years (2010-2012), the company acquired 11 companies for an aggregate amount of $185.2 million net of cash. Although most of the acquisitions were that of start-ups and small companies, they helped Flextronics to expand its presence in the communications, medical, infrastructure and automotive sectors.

In the first six months of fiscal 2013, Flextronics acquired three companies catering to different sectors namely medical, hardware manufacturing and LED design and manufacturing market. We believe that Flextronics will continue to pursue strategic acquisitions in different markets that are easy to integrate along its product line going forward.

Our Take

Flextronics has undertaken a number of new initiatives in order to become more competitive, which includes divestiture of non-core assets and deployment of new technologies. New programs are expected to boost production volumes by early fiscal 2014, although profitability is expected to remain weak due to continuing investments.

In this regard, we believe that strategic acquisitions and strong new bookings will also drive top-line growth over the long term. However, macro-economic concerns and weak end-market demands are major concerns in the near term.

Moreover, the portfolio realignment is also expected to hurt Flextronics’ top-line growth in the near term. Further, increasing competition from Jabil Circuit Inc. remains a concern going forward.

Thus, 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).

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