We maintain our Neutral rating on Plexus Corp. (PLXS) but raise our price target to $39.00. Our target price represents a multiple of 19.4X our 2010 EPS estimate, a premium to the peer group and the S&P 500.
Plexus exhibited incremental growth opportunities in the first quarter of 2010 and we expect growth to reaccelerate in the second half of fiscal 2010 and get stronger in the year 2011 as the economy recovers and spending improves. The company also provided a robust guidance for the upcoming quarter. A strong cash position and impressive cash flow are other positives for the stock.
We believe that over the long-term, Plexus will be in the top tier of the EMS universe with the highest gross margin and above industry growth rates. Plexus’ first-quarter earnings beat the Zacks Consensus Estimate and have been above management’s own guidance.
Although revenue growth at Plexus has been above expectations historically, the year 2009 has been choppy as both revenue and EPS have fallen and margins have decreased on a year-over-year basis due to the economic recession. Near-term, the margins are expected to see pressure due to new program wins and increased spending.
Engineering agreements generate higher margins and are improving the company’s overall profitability. The company generated approximately $20 million in revenues in the fourth quarter of 2009 from engineering bookings. In the current quarter, Plexus had 16 new program wins, which are currently estimated to deliver approximately $108 million in annualized revenue.
The Coca-Cola Company (KO) win is expected to deliver incremental growth opportunities in 2010 and beyond. The partnership is expected to deliver incremental revenues of approximately $200 million in 2010 and represents a significant mechatronics (engineering agreement) win for Plexus. Further, the company expects to ramp up production levels of the ‘”Coca-Cola Freestyle” program and the “crew serve” program in fiscal 2011.
We expect the company to deliver both sequential and year-over-year growth in earnings and revenue in the upcoming quarters. Over the long term, we expect the company to benefit from the growing need for Medical, Wireline and Wireless infrastructure globally.
Estimate Revisions
Plexus has experienced a rapid acceleration of revenue and profits in the first quarter. In Jan, 2010, Plexus reported first-quarter 2010 earnings of 44 cents per share, excluding restructuring charges and tax impact but including stock based compensation. The result beat the Zacks Consensus Estimate of 34 cents per share, and was above management’s guidance of 31 cents to 36 cents per share. Earnings per share were even with last year’s 44 cents per share and benefited from a lower tax rate and a favorable legal settlement in the quarter.
Plexus also provided a robust guidance for the second quarter of fiscal 2010. Earnings per share are expected to be in the range of 44 cents – 52 cents, excluding restructuring charges but including 7 cents per share in stock-based compensation expense.
The current Zacks Consensus Estimate for the upcoming quarter (second-quarter 2010) is a profit of 49 cents per share and for the full year 2010 is $1.92.
The company has seen no estimate revision over the past 30 days for the second quarter. None of the 9 analysts following the stock have changed their earnings estimates in either direction. Consequently, we see an absence of catalysts that could drive the shares higher.
Additionally, we expect the company to report in line with the Zacks Consensus. Thus we maintain our Neutral recommendation on the stock.
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