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Why is Flex (FLEX) Down 16.4% Since its Last Earnings Report?

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It has been about a month since the last earnings report for Flex Ltd. (FLEX - Free Report) . Shares have lost about 16.4% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is FLEX due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Flex  reported fourth-quarter fiscal 2018 non-GAAP earnings of 28 cents per share, which missed the Zacks Consensus Estimate by a couple of cents. Moreover, the figure declined 3.4% from the year-ago quarter.

Revenues increased 9.3% from the year-ago quarter to $6.41 billion, coming at the higher end of guided range and also beat the Zacks Consensus Estimate of $6.23 billion.

The year-over-year revenue growth can be attributed to robust performance across most segments. The top-line benefited from new business wins driven by the Sketch-to-Scale initiative as well as continued development of the long-term strategic partnership with Nike. However, increasing expenses focused on supporting company’s products, keep the bottom line under pressure.

Quarter Details

CEC revenues declined 5.4% from the year-ago quarter to almost $1.88 billion. Legacy-end markets impacted results. However, expansion in its data center capabilities holds promise.

CTG revenues improved 7.2% from the year-ago quarter to $1.65 billion.

Revenues from the IEI segment were $1.64 billion, which surged 26.3% on a year-over-year basis. The segment benefited from a robust demand across its diversified markets as well as the beginning of several Sketch-to-Scale programs.

HRS revenues were up a robust 19.4% from the year-ago quarter to $1.25 billion.

Operating Details

Adjusted gross margin contracted 40 basis points (“bps”) on a year-over-year basis to 6.7% in the quarter.

Adjusted selling, general & administrative (“SG&A”) expenses were $229 million, exceeding the year-over-year figure by almost $15 million. However, as a percentage of net sales, SG&A expenses declined 10 bps to 3.6% primarily due to increasing design and engineering cost. Moreover, higher level of investment and under-absorbed overhead costs increased expenses.

Non-GAAP operating margin declined roughly 40 bps on a year-over-year basis to 3.1%.

Segment wise, CEC generated $45 million in adjusted operating profit and recorded adjusted operating margin of 2.4%, marginally missing the guided range of 2.5-3.5%.

CTG raked in $24 million in adjusted operating profit, resulting in an adjusted operating margin of 1.5%, a tad lower than the guided range of 2-4%.

IEI reported $68 million in adjusted operating profit and 4.1% adjusted operating margin, within the targeted range of 4-6%.

HRS reported $97 million in adjusted operating profit, resulting in adjusted operating margin of 7.8%, near the higher end of guided range of 6-9%.

Balance Sheet & Cash Flows

As of Mar 31, 2018, cash & cash equivalents were $1.47 billion compared with $1.29 billion as of Dec 31, 2017. Total debt was $2.94 billion unchanged from Dec 31, 2017.

Flex generated net cash from operations of $323 million compared with $150 million in the previous quarter. Free cash flow of $195 million was reported compared with $32.8 million in the previous quarter.

The company bought back shares worth $180 million shares in fiscal 2018, consequently fulfilling the commitment to return more than 50% of annual free cash flow to shareholders.

Guidance

For first-quarter fiscal 2019, revenues are expected to be in the range of $6.3-$6.7 billion. The company expects CTG, IEI and HRS to grow 7%, 26% and 19%, respectively, on a year-over-year basis. However, CEC is anticipated to decline by 5% year over year.

Adjusted operating income is projected in the range of $170-$200 million. Moreover, adjusted earnings are expected between 22 cents and 26 cents per share.

The company anticipates interest and other expenses in the range of $35-$40 million in the first quarter of 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been three revisions lower for the current quarter.

Flex Ltd. Price and Consensus

 

Flex Ltd. Price and Consensus | Flex Ltd. Quote

VGM Scores

At this time, FLEX has an average Growth Score of C, however its Momentum is doing a lot better with an A. The stock was also allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is equally suitable for value and momentum investors while growth investors may want to look elsewhere.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. It's no surprise FLEX has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.




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