(PLXS) Plexus Corporation Upgraded to Outperform

We have upgraded Plexus Corp. (PLXS) to Outperform from our previous Neutral rating.  Year to date, Plexus’ shares are up 43.5%, outperforming the S&P 500 and the peer group.
 
Plexus’ fourth-quarter results and the guidance for the next quarter were above the Zacks Consensus Estimate. While year-over-year results were weak, hurt by recession, the company posted impressive sequential growth due to new customer wins and product mix.
 
Earnings per share fell 20.8% from the year-earlier profit of 48 cents but rose 65.2% from 23 cents reported in the previous quarter. Earnings benefited from a lower tax rate in the quarter.

Revenues for the quarter came in at $393 million, a decrease of 17.4% from $476 million reported in the year-ago quarter but up 4% from $379 million reported in the previous quarter. The company witnessed the first sequential increase in revenue in the current quarter since the fourth quarter of fiscal 2008.
 
Moreover, revenue growth at Plexus has been above expectations historically but the year 2009 has been choppy, as both revenues and EPS have fallen and margins have decreased on a year-over-year basis due to the weak economy and slowing demand. However, the company expects to return to growth in fiscal 2010 due to a rebound in end-market demand.
 
Moreover, a strong cash position and impressive cash flow are other positives to the stock. We believe that Plexus is poised to grow with a strong pipeline, new customer wins and lower inventory levels in 2010.
 
Over the long-term, we expect the company to benefit from the growing need globally for Medical, Wireline and Wireless infrastructure. In the near-term, the margins are expected to see pressure due to new program wins and increased spending, but we expect growth to reaccelerate in the second half of fiscal 2010 and get stronger in the year 2011.
 
The contract manufacturing industry is highly competitive and margins have been low industry-wide. Plexus is small compared to its peers such as Flextronics International Ltd. (FLEX), Jabil Circuit (JBL), Benchmark Electronics (BHE) and Sanmina-SCI (SANMD).
 
Based on forward earnings estimates, the stock is trading at 17.4X, a discount of 44.2% to the peer group. We are raising our estimates for fiscal 2010 and set a six-month price target at $28.00.

(PLXS) Plexus: Earnings Preview