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Flex Ltd: Oversold

May 01, 2018 8:58 AM ETFlex Ltd. (FLEX)7 Comments
Michael Turner profile picture
Michael Turner


  • For the last 12 years, CEO Mike McNamara has shifted Flex's business focus towards the higher margin operations of design, engineering and supply chain services (management's "sketch to scale" initiative).
  • The announcement of an investigation by Flex's Audit Committee into improper accounting practices in the past has caused a 21% crash in Flex Ltd's stock price.
  • Over the next 3 years, expansion in the higher margin "sketch to scale" business will dramatically boost revenues, providing an attractive opportunity to investors as the stock is currently severely undervalued.

The Crash

Flex Ltd's stock (NASDAQ:FLEX) was smashed before its Q4 results were due to be released due to an earnings downgrade by management, and the claims by a former employee of improper accounting practices within the company:

In addition, as mentioned in our press release, in accordance with our high standard corporate governance, the Audit Committee of our Board of Directors with the assistance of independent outside counsel is undertaking an independent investigation of allegations made by an employee, including that the company improperly accounted for obligations in a customer contract and certain related reserves.
(Source: Seeking Alpha - (FLEX) Q4 2018 Results - Earnings Call Transcript)

This caused the stock to fall over 21%:

(Source: Google Finance)

This has reduced Flex's valuation to a PE ratio of 13 (TTM), despite the growth story that is still unfolding at the company. As such, investors must decide if they believe the revelations from this investigation (and potential historical earnings revisions) will cause material harm to the company moving forward. Class action lawsuits by Flex shareholders represent the primary future risk to Flex, however, I do not anticipate any realistic outcome from this situation to present material risk to the future of Flex, and as such, the recent falls represent an opportunity for interested investors to enter positions (however, all investors should perform their own due diligence and understand the risks to shareholders that exist in these situations).


Flex Ltd is a multinational manufacturing corporation, and since 2006 Flex's management has shifted the company's focus towards the higher margin businesses of providing design, engineering, and supply chain services and solutions to worldwide OEM's. This strategy has experienced early success in the form of increased margins, and when combined with the growing strength in the US manufacturing sector, revenues will be dramatically increased by 2020:

ChartFLEX data by YCharts

ChartFLEX data by YCharts

This article was written by

Michael Turner profile picture
I am based in governance roles in Sydney, Australia - as such, a large portion of my research is focused on the quality of governance in mid-cap ASX listed corporations.

Analyst’s Disclosure: I am/we are long FLEX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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