UPDATE: Raymond James Upgrades Flextronics (FLEX) to Strong Buy
Raymond James upgraded Flextronics (NASDAQ: FLEX) from Market Perform to Strong Buy with a price target of $12.50, suggesting upside of 30%. The change follows strong Q3 results. Analyst Brian G. Alexander said Flextronics' margin story is "underappreciated."
"With shares down 15% year to date (lagging peers and market indices), and estimates increasing following an upside surprise to F3Q results, we see a much more attractive risk/reward. Our positive thesis reflects 1) continued margin expansion, 2) improved organic growth trends, 3) commitment to responsible capital allocation and 4) a compelling valuation," said Alexander.
The analyst added, "Operating margins have expanded by double digits for nine consecutive quarters, and we see this trend continuing through FY17 due to a greater mix of programs that are more complex and longer lifecycle in nature, as well as improved efficiencies in the IEI segment. In fact, mix alone could drive nearly 10 bp of operating margin improvement per year through FY18. The higher-margin HRS and IEI segments now exceed ~50% of operating income, up from 43% a year ago. We see this exceeding 60% in FY18. This should lead to core operating margins approaching 3.5% in FY17, up from 3.2% in FY16 and under 3% historically. We suspect that shares will get rerated as margin improvement proves to be stickier than investors surmise."
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Shares of Flextronics closed at $9.53 yesterday.