Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Flextronics (FLEX) hardly reacted to last week's announcement that the firm agreed to acquire Saturn Electronics & Engineering. By acquiring Saturn, Flextronics expands its offerings in the Automotive Energy Management field.

The Deal

Flextronics announced on Monday that it will acquire the Michigan-based company. Few details regarding the deals were announced, with the exception that Saturn generates annual revenues surpassing $300 million.

Saturn supplies electronic manufacturing services to a range of industries including the automotive, consumer, energy and industrial market. The majority of its revenues, over 70%, are being generated in the automotive industry. The deal gives Flextronics access to low cost manufacturing areas in Asia.

Chris Obey, President of Flextronic's Automotive business, commented on the deal, "Flextronics is pleased to announce that it has acquired Saturn Electronics & Engineering, a company that is renewed for manufacturing excellence and unmatched quality as a supplier of electronics, wiring and high-precision engineered solenoid solutions. Our combined capabilities will provide customers with an expanded range of services in automotive energy management and vehicle electronics."

Valuation

Flextronics ended its second quarter of its fiscal 2013 with $1.56 billion in cash and equivalents. The company operates with $2.10 billion in short and long term debt, for a net debt position of roughly $540 million.

For the first six months of the year, Flextronics generated annual revenues of $12.1 billion. Net earnings for the period came in at $279 million. Full year revenues could come in around $24 billion, on which the company could earn around $550-$600 million.

The market currently values Flextronics at roughly $4.0 billion. This values the firm at roughly 0.17 times annual revenues and 7 times annual earnings.

Flextronics does not pay a dividend.

Some Historic Perspective

Year to date, shares of Flextronics have risen a mere 5%. Shares started the year around $5.50 per share and rose to $7.50 in March. Shares steadily fell back during the remainder of the year, trading around $6 per share at the moment.

Shares of Flextronics traded as low as $2 at the start of 2009, and shares rose to $8 in 2010 and 2011. Revenues fell from $30.9 billion in 2008 to roughly $24 billion this year. Lower revenues are attributable to lower High Velocity Solutions contributions in an attempt to transform the business portfolio.

Investment Thesis

The addition of Saturn Electronics & Engineering has a limited effect on Flextronics' financial results. The addition will boost annual revenues by little over $300 million, or 1.2% of total revenues, based on Flextronics' full year revenue outlook of $24 billion. The deal is rather small, but is rather significant for shareholders as it indicates that Flextronics continues to look at selective growth opportunities, including the deal with Saturn.

At the same time Flextronics continues to divest, close or cut back on underperforming businesses in its portfolio. The company hopes to selectively grow and rationalize its portfolio at the same time. During the last year, the company cut back drastically on its High Velocity Solution business.

Given that Flextronics announced few financial details regarding the deal, evaluating this particular deal is hard to do. The deal is not Flextronics' first acquisition in recent times, over the last few years Flextronics acquired a dozen of smaller companies, mostly start-ups.

The deal fits in Flextronics' strategy to optimize the industrial business portfolio of the company. The company is slashing its underperforming businesses, but at the same time it selectively invests in small promising businesses. As such, the company hopes to break the vicious cycle of declining revenues and earnings in recent years.

Flextronics' performance has been under pressure in recent years as a general weak economy and the continued transformation of the business, severely impacts profitability. Strong competition from competitors like Jabil Circuit (JBL) is impacting earnings as well.

Valuation multiples seem very appealing, despite stagnating operating performance. Other positive signs are the sizable share repurchases over the past years, indicating that management thinks shares are undervalued. Investors are fearful however of a repeat of 2009 when the company reported a massive $6.1 billion loss.

Shares look appealing at these levels, after shareholders have experienced a lost decade, with shares trading off 85% from their highs of 2000. Despite the value in the shares at these levels, I see few short-term triggers which make shares interesting at this point.

Source: Flextronics: Announcement Of Saturn Acquisition A Sign Of Continued Transformation