We have downgraded Plexus Corp. (PLXS) to Neutral from our previous Outperform rating with a six-month price target of $31. Our target price represents a multiple of 19.6X our 2010 EPS estimate, slightly above the S&P 500.
 
The impact of weak economic conditions significantly contributed to reduced revenue, gross margin and return on invested capital (ROIC) in fiscal 2009. During fiscal 2009, the company’s ROIC was 13.2%, gross margin was 9.6% and operating margin was 3.3%. This compares to ROIC of 20.1%, gross margin of 11.2% and operating margin of 5.6% in 2008.
 
Results were negatively impacted by the decline in net sales and unfavorable changes in customer mix, as well as reduced demand from Juniper Networks (JNPR) – the company’s largest customer accounting for 20% of revenues. We expect the carry over effect of the bleak economic conditions to continue to tell on the company’s results in the next few quarters.
 
Plexus’ fourth quarter results and guidance for the next quarter were above expectations. While both revenue and earnings have declined year over year in 2009, the company expects growth to reaccelerate in the second half of 2010.
 
Moreover, a strong cash position and impressive cash flow are other positives to the stock. Over the long term, we expect the company to benefit from the growing need globally for Medical, Wireline and Wireless infrastructure.
 
However, in the near term, the margins are expected to see pressure due to new program wins and increased spending. Moreover, we advise the stockholders to remain on the sidelines until Plexus exhibits incremental growth opportunities through some stabilization in its legacy customer programs and stronger end-market recovery.
 
The contract manufacturing industry is highly competitive and margin has been low industry-wide. Plexus is a small player compared to its peers such as Flextronics International Ltd. (FLEX), Jabil Circuit (JBL), Benchmark Electronics (BHE) and Sanmina-SCI Corp. (SANM).
Read the full analyst report on “PLXS”
Read the full analyst report on “JNPR”
Read the full analyst report on “FLEX”
Read the full analyst report on “JBL”
Read the full analyst report on “BHE”
Read the full analyst report on “SANM”
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