Plexus: Earnings Preview

A leading provider of electronic manufacturing services, Plexus Corp. (PLXS), is scheduled to release its first quarter 2011 results on January 19, 2011, after market close.

Since the release of fourth quarter 2010 results, Plexus shares have fallen 9.0%. However, Plexus’ fourth quarter 2010 results beat the Zacks Consensus Estimate and were above management’s own expectation.

Despite upbeat results, management remained apprehensive about results for the first half of 2011, which are expected to remain weak with significant headwinds. This is due to the slow down of production for two customers and an increase in operating costs.

However, Plexus expects the second half of 2011 to be strong driven by a ramp up in new business wins, revival in economy and surge in customer demand. These should also pull up full-year 2011 results.

Plexus has posted an average surprise of 7.7% in the trailing four quarters, implying that it beat the Zacks Consensus Estimate by 7.7% on an average.

Fourth Quarter 2010 Synopsis

Plexus’ fourth quarter 2010 earnings of 65 cents per share beat the Zacks Consensus Estimate of 60 cents, posting a surprise of 8.3%.

Earnings per share (EPS) leaped 71.1% from year-ago quarter’s earnings of 38 cents. Sequentially, EPS escalated 10.2% from 59 cents. The quarter’s EPS was also above management’s guidance of 58 cents to 63 cents. Earnings increased significantly, riding on improving end-market conditions and production ramps of manufacturing programs won over the past few quarters.

Gross margin was 10.1% and operating margin was 5.2% in the fourth quarter, consistent with the company’s expectation. This compares with gross margin of 9.6% and operating margin of 3.8% in the year-ago quarter.

Quarterly revenues came in at $555.6 million, an increase of 41.4% from $393.0 million in the year-ago quarter, attributable to new business wins and improving end-market demand. Sequentially, revenues increased 3.7%. Revenues were at the high end of the company’s guided range of $530 million to $555 million and had surpassed the Zacks Consensus Estimate of $546 million.

Better-than-expected results were attributable to robust sector performance with Wireless Infrastructure, Medical and Industrial/Commercial sectors seeing sequential growth. However, the decline in Wireline/Networking and Defense/Security/Aerospace sectors during the quarter acted as a headwind.

Outlook

During the fourth quarter earnings call, Plexus gave its guidance for the first quarter of 2011. Management expects EPS in the range of 56 cents to 62 cents. The current Zacks Consensus Estimate for the first quarter is a profit of 60 cents per share, in line with the company’s expectation.

Revenues for the first quarter are projected in the range of $550 million to $580 million, flat to modestly up sequentially. Revenues for the second quarter are expected to slow down. For the long term, management anticipates compounded annual revenue growth of over 15% and ROIC in the range of 18.5% to 20%.

No Movement in Estimates

Plexus had several growth opportunities in 2010 and was well above the Zacks Consensus Estimate. We believe Plexus remains well positioned for growth in 2011 due to the expansion of its global footprint, new customer wins and improving end-market demand and contributions from the Coca-Cola win. However, we expect the year to be back-end loaded.

Intense competition in the EMS market from Flextronics International Ltd. (FLEX) and Jabil Circuit Inc. (JBL), small market share, continued component challenges and some supply chain constraints are negatives. Currently, there is no significant catalyst to drive the share price higher. We therefore maintain our Neutral rating on the stock over the long term.

Given no change in the Zacks Consensus Estimate for the first quarter EPS in the last 60 days, Plexus is expected to report in line results. The shares are expected to remain range bound in the near term. Lack of estimate revision is reflected in the Zacks Rank of #3 for Plexus, implying a Hold rating over the short term.

Disclosure: No position