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FLEX INC. - Can We Trust The "Adjusted" EPS?

|About: Flex Ltd.. (FLEX)


in Fiscal 2017 GAAP Earnings for FLEX were roughly 60 cents versus 80 cents the prior year. That is a significant decline versus touting "adjusted" EPS having risen to $1.18.

Revenues were down slightly from 2016 to 2017 but overall margins are still rising and cash flows remain strong. This is the positivepart of the story.

When will the multi-year engagement with NIKE Inc. finally pay off in significant revenues and profits? Still have no clue buthopefully sooner rather than later.

Flex Inc. (FLEX) reported Q4 2017 results on April 27th, 2017 with Generally  Accepted Accounting Principals (GAAP) Earning per Share (EPS) of 59 cents compared to GAAP EPS of 79 cents for Fiscal 2016. Revenues were down slightly to just below $24 billion for Fiscal 2017 (FY 2017) from slightly over $24 billion in revenues in FY 2016. As per the CEO and CFO of FLEX, adjusted earning per share rose from $1.14 in FY 2016 to $1.17 in FY 2017. Just forget about interest expense and amortization of intangible assets which both may total as much as $200 million per year (2018 onward).

I trust the GAAP numbers which includes items like Interest Expense and Amortization of Intangible Assets which I believe are valid business expenses and should be included in the financial results. FLEX reported "Adjusted" EPS of $0.84 in FY 2013, $0.89 in FY 2014, and $1.08 in FY 2015. This created a nice steady increase in reported EPS which supports a stronger stock price.

When you include valid business expenses like interest expense and amortization of goodwill and other assets. Both of these items run around $100 million per year. That adds up to roughly $200 million in expenses that will be EXCLUDED from the numbers which FLEX Management and the Wall Street analysts use for their analysis. 

So earnings were down from 2016 to 2017. What's the big deal? 

FLEX is now in transition to a more profitable, more sophisticated business model with around $24 billion of revenues expected by me for FY 2018. This estimate for the full fiscal year 2018 is based simply on $6 billion of revenue per quarter. I estimate actual earnings per diluted share are running around $0.80 cents in US dollars and the current stock price over $16 indicates a Price/Earnings Ratio of around 20 times. That is expensive until revenues begin rising on day on the back of NIKE and other new business.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.