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Here's Why You Should Stay Away From Flex at the Moment

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Similar to wise buying decisions, exiting certain underperformers at the right time helps maximize portfolio returns. Selling off losers can be difficult, but if both the share price and estimates are falling, it could be time to get rid of the security before more losses hit your portfolio.

One such stock that you may want to consider dropping is Flex Ltd. (FLEX - Free Report) , as it has witnessed a significant price decline in the past one year. Moreover, it has seen negative earnings estimate revisions for the ongoing quarter and the current year. A Zacks Rank #5 (Strong Sell) further ascertains the innate weakness of Flex.

Estimates Moving South

The company has been witnessing a negative earnings estimate revision trend. For the current year, we have witnessed one estimate moving down in the past 30 days. This trend has caused the consensus estimate to trend lower, dropping from $1.24 a share a month ago to its current level of $1.23 per share.

Further, for the current quarter, Flex has seen one downward estimate revision, dragging the consensus estimate down to 24 cents a share from 25 cents over the past 30 days.

Falling Behind the Industry

Flex has underperformed the industry it belongs to over the past year. The stock lost 13.4% against the industry’s rise of 10.8%.

Negative Earnings Surprise History

In fact, Flex’s earnings history is also not impressive. The company missed the Zacks Consensus Estimate in two of the last four quarters, recording an average negative earnings surprise of 0.8%.

Higher Debt Level Remains a Concern

Flex’s balance sheet is highly leveraged, which adds to the risk of investing in the company. As of Mar 31, 2018, the company had total debt (including the current portion) of almost $2.94 billion. We note that interest expense has increased significantly in the last couple of years due to higher debts. Consequently, bottom-line growth has been negatively impacted. The higher interest expense along with increasing tax rate (10–15% from 8–9%) is anticipated to affect the bottom line in fiscal 2019 and beyond.

Near-Term Headwinds Remain

The company faces stiff competition from other EMS providers like Jabil Circuit, Benchmark Electronics, Celestica, Sanmina-SCI Corporation and Taiwan-based Original Design Manufacturing (“ODM”) suppliers like Foxconn. Intensifying competition negatively impacts contract wins, hurting top-line growth.

In order to remain competitive, the company has also increased spending on research & development (particularly on design and innovations business) in the last 12 months. Moreover, continuing investments on “Sketch-to-Scale” portfolio transition is expected to increase operating expenses. This will eventually keep margins under pressure at least in the near term.

Moreover, the company generates a significant portion of its revenues from the International market. Consequently, we expect adverse foreign currency exchange rates to impede revenue growth in the near term owing to fluctuation in the U.S. dollar as against the Chinese renminbi, Brazilian real, the Euro and other foreign currencies.

Bottom Line

Looking at the prevailing challenges and an unfavorable Zacks rank, it will be prudent to stay away from Flex stock right now. So it may not be a good decision to keep this stock in your portfolio anymore, at least if you don’t intend to wait for a long time.

Key Picks

Some better-ranked stocks in the broader technology sector include Intel Corporation (INTC - Free Report) , Micron Technology, Inc. (MU - Free Report) and NetApp, Inc. (NTAP - Free Report) , all sporting a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Intel, Micron and NetApp have a long-term expected EPS growth rate of 8.4%, 8.2% and 13.8%, respectively.

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