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It has been about a month since the last earnings report for Flex (FLEX). Shares have lost about 1.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Flex due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Flex Q3 Earnings & Revenues Beat Estimates
Flex Ltd reported third-quarter fiscal 2021 adjusted earnings of 49 cents per share that beat the Zacks Consensus Estimate by 32.4%. Moreover, the figure increased 28.9% year over year.
Revenues increased 4% year over year to $6.72 billion and beat the consensus mark by 7.4%. The top line benefited from primarily strength seen in the Agility Solutions and Reliability Solutions segments.
After a massive disruption due to coronavirus outbreak, automotive sector, globally, is now witnessing strong recovery that bodes well for Flex in the long term. Flex is expanding its business in the automotive sector especially in the field of autonomous cars and electrification.
Beginning fiscal first quarter, the company started reporting in two segments — Flex Agility Solutions Group and Flex Reliability Solutions Group.
Flex Agility Solutions Group comprises Communications & Enterprise Compute or CEC, Lifestyle and Consumer Devices businesses. Revenues increased 6% year over year to $3.834 billion.
Within the segment, Lifestyle division reported 10% revenue growth driven by increased demand for high-end audio and appliance end market.
CEC unit revenues improved in low single digits on a year-over-year basis. The segment’s top line benefitted from higher cloud and critical infrastructure spend.
Consumer devices’ topline improved in high single digits on a year-over-year basis due to seasonality in consumer spending.
Flex Reliability Solutions Group comprises Health Solutions, Automotive and Industrial businesses. Revenues increased 2% year over year to $2.886 billion.
In automotive, ongoing recovery in the sector, globally, was the driving factor behind increases in the segment’s revenues in the quarter under review. On a year-over-year basis, automotive unit reported top-line growth in high single digits in the fiscal third quarter.
Also, Flex’s Health Solutions business continued to benefit from higher demand for critical care equipment like ventilators, fusion pumps, patient monitors and ICU beds. The segment’s top line increased in double digits year over year.
However, revenues from Industrial unit were down in high single digits primarily owing to a customer-specific headwind.
Non-GAAP gross margin expanded 50 basis points (bps) on a year-over-year basis and came in at 7.6% in the reported quarter.
Non-GAAP selling, general & administrative (SG&A) expenses, as a percentage of revenues, declined 10 bps year over year to 3%.
Non-GAAP operating margin expanded 60 bps on a year-over-year basis to 4.6% benefiting from cost-containment efforts.
Flex Agility Solutions Group adjusted operating margin was 4%. Flex Reliability Solutions Group adjusted operating margin was 6.2%.
Balance Sheet & Cash Flow
As of Dec 31, 2020, cash & cash equivalents were $2.61 billion, up from $2.36 billion as of Sep 25, 2020.
Long-term debt (including current portion) was $3.81 billion as of Dec 31, up from $3.8 billion as of Sep 25.
Net cash provided by operating activities was $348 million during the reported quarter compared with $51 million used in operations in the year-ago quarter and $265 million of net cash generated in the previous quarter.
Adjusted free cash flow was $289 million in the reported quarter compared with free cash flow of $238 million in the year-ago quarter and $326 million of free cash flow in the previous quarter.
For fourth-quarter fiscal 2021, Flex expects revenues between $5.6 billion and $6 billion.
Adjusted operating income is expected between $225 million and $265 million. Adjusted earnings are expected in the range of 32-38 cents per share.
For the fiscal fourth quarter, Flex Agility solutions is expected to report year-over-year revenue growth of low to high single digits. The upside is likely to be driven by continued strength in Lifestyle and CEC units along with ongoing recovery in the emerging markets to benefit Consumer Devices’ revenues.
Lifestyle segment is anticipated to be up in high single digits to low teens on a year-over-year basis. CEC is projected to be up in low to mid-single digits year over year in the fiscal fourth quarter.
Consumer Devices is expected to be up low single digits in the fiscal fourth quarter on a year-over-year basis.
Flex Reliability Solutions’ is projected to report year over year revenue growth of low to high single digits based on a recovering automotive sector along continued strength in industrial end-market such as core industrial and power products. Both the divisions are anticipated to report revenue growth in low to mid-single digits on a year over years basis.
However, Health Solutions’ division is likely to witness growth in low double digits to mid-teens on a year over year basis in the fiscal fourth quarter. Higher demand for critical care products like ventilators, while demand for products for elective procedures is yet to pick up pace due to second wave of coronavirus wave.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 25% due to these changes.
At this time, Flex has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Flex has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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