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Summary

  • Revenues still fell by 4% Y/Y but sales to new customers skyrocketed ~200% Y/Y. While MFLX still posted an EPS loss, forward guidance expects non-GAAP breakeven.
  • The long thesis worked well, with a ~20% gain in three months as my target price was hit. However, the stock later fell below the initial level.
  • I reiterate my long thesis. MFLX offers another attractive entry point with ~50% upside within two years. However, downside should be fully protected at 10% below the purchase price.

Multi-Fineline Electronix, Inc. (NASDAQ:MFLX) reported Q2 2014 results for the third quarter fiscal 2014 ended June 30, 2014 in line with its guidance (SEC filing, press release, earnings call). Net sales were $130.8M, down 4% Y/Y due to lower sales to two key customers, Apple and BlackBerry, partially offset by a significant increase in sales to the company's newer customers. Net sales to the newer customers in the quarter increased ~212% to $63.2M, to account for roughly half of all sales. However, one of these new customers represented 23% of total sales, so MFLX is becoming dependent on another customer. Apple accounted for 43% of sales. Gross margin was negative 5.5%, worse than a year ago due to restructuring and goodwill impairment charges. The restructuring plan designed to return MFLX to profitability was substantially completed during Q2 2014. Net loss lowered Y/Y to $1.19 per share from $1.32. Non-GAAP net loss worsened to $0.86 per share from $0.77 a year ago.

Outlook for the third quarter is positive. For the fourth quarter of fiscal 2014, the company expects increased sales sequentially for the rest of 2014 and break-even net income in Q3, excluding impairment and restructuring charges. Net sales are guided to be between $150M and $180M, with gross margin of 4% to 7%. The company remains to have a highly concentrated customer base, with Apple accounting for 43% of sales. MFLX also depends on the success of smartphones and tablets, as roughly 71% of sales were derived from the smartphone sector and further 15% from tablet segment and the remainder stemming from consumer electronics. With capacity still well below its potential, MFLX has plenty of room to increase sales and improve gross margins.

In my original thesis in November 2013, my fair value estimate was $14.87 and I wrote that negative expectations were all priced in. This proved to be correct and my target price was hit roughly three months later in February, so there was a good opportunity to make ~20% on my thesis. However, later the stock started sliding and now trades lower, at ~$10 mark. MFLX once again offers a good entry point. I reiterate my long thesis and set a target price of ~$15 per share, so the stock now offers a ~50% upside within two years. However, due to extreme customer concentration, lumpy orders and cyclical nature of the semiconductors industry, there is too much sudden downside risk which should be fully protected 10% below the buying price, for example by purchasing out-of-money put options.

Source: Update: Multi-Fineline Electronix Earnings - In Line, Showing A Break-Even May Be Near