Analysts Say Plexus Hits Sweet Spot

Analysts Say Plexus Hits Sweet Spot

 

Analysts Say Plexus Hits Sweet Spot

 


By Hal Plotkin
Silicon Valley Correspondent

Analysts see more upside potential for Plexus Corp.’s {PLXS} soaring stock, saying the company’s focus on serving high-end, high-margin customers in the electronic manufacturing sector puts it squarely in the industry’s sweet spot.

“It’s had a huge run-up, over 50 percent, in the last 50 days,” says Bill Cage, an analyst at First Union Securities Inc. in Nashville, Tenn. “They’re landing a lot of major [original equipment manufacturing] customers who need high-reliability electronics.”


Plexus Corp. 52-week stock performance chart

Plexus’s stock has pulled back somewhat in recent sessions after an almost frantic bull run. But, like most of the analysts tracking it, Cage is looking for it to go still higher.

Cage has a “buy” rating on the stock, along with a 12-month price target of 155, which he says is based on 50 times his earnings estimate of $3.10 a share for the fiscal year ending next June 30.

Plexus, a contract manufacturer based in Neenah, Wis., specializes in providing engineering and design services, in addition to production and assembly for major accounts such as Cisco Systems Inc. {CSCO} and General Electric Co.’s {GE} medical-products division. (General Electric is the parent company of CNBC.com).

Analysts say Plexus derives many benefits from focusing the attention of its approximately 350 degreed design engineers on the high-margin, front-end of the new product-creation process, which accounts for about 20 percent to 25 percent of the firm’s revenue.

For starters, the company’s design and engineering capacities allow it to charge much higher prices than would be the case if it manufactured products that had already been designed by others. In addition, by focusing on newer products, rather than manufacturing commodity items, Plexus is able to form relationships with both start-ups and larger, pre-existing companies that are developing new product lines and often, entirely new markets.

“Plexus’s engineering and design is the most respected in the industry, regardless of size,” says Roger Norberg, an analyst with Chase H&Q, based in Minneapolis.

Norberg has a “buy” rating on the stock, along with a 12-month price target of 145.

Analysts say the recent run-up in Plexus’s stock was tied to several factors, most notably the recently announced acquisition of one of the company’s fastest-growing customers, ArrowPoint Communications Inc. {ARPT}, by Cisco.

“We expect Cisco to award Plexus new business following Cisco’s acquisition of ArrowPoint,” J. Keith Dunne, an analyst at Robertson Stephens in San Francisco, wrote in a recent report.

Dunne’s previously published projections called for Plexus to earn $2.50 a share in fiscal 2001. But he says increased business from Cisco, along with other customer wins in the fast-moving optical-components sector, should push the company’s numbers up.

“We now expect. . .full-year estimates to rise 5 to 10 percent through fiscal 2001,” Dunne wrote in a research note distributed to attendees at the by-invitation-only Robertson Stephens electronic manufacturing services conference held late last month in San Francisco.

All told, Plexus expects to ramp up sales to Cisco’s ArrowPoint acquisition from $2 million a few years ago to $40 to $50 million in fiscal 2000 and to $200 million in fiscal 2001, Thomas B. Sabol, the firm’s chief financial officer, told attendees at the Robertson Stephens conference.

The projected increase in business from Cisco, while important over the short term, doesn’t, however, account for most analysts’ long-term faith in the stock, since individual customers can and do come and go.

Instead, they say Plexus is using its current customer base to create core competencies that should serve it very well as the overall pace of the economy continues to accelerate.

The analysts say companies can’t afford to waste time bringing new products to market or trying to recreate the wheel, design-wise.

Plexus, on the other hand, is able to constantly refine and reuse state-of-the-art design approaches to help its diverse customer base bring new products to market more rapidly.

“The need for that is only going to grow,” says David Parrish, an analyst at Dain Rauscher Wessels in Boston.

Parrish has a “strong buy” rating on the stock, along with a $120 12-month price target.

“Plexus is one of our top three picks right now,” Parrish says. “They have a strategy very different from most others. It’s a great fit for start-ups.”

Parrish says it is likely that the economy of the future will look like the economy of today, only more so. That means more and more companies will be rushing to bring complex, new electronic products to market, particularly in the telecommunications and
medical-equipment markets. The premium will be on finding manufacturing partners that have the design skill and experience needed to help them gain a competitive advantage over other firms offering similar products.

“There has been a misconception that the electronic manufacturing sector will consolidate to the five or so biggest companies,” Norberg says. “But having scale alone is not going to be enough. The real definer is, where do you fit in the technology ladder?”

The best rewards, Norberg says, will go to firms with Plexus’s level of technical talent and expertise.

“It’s not all about size,” Norberg says. “It’s about ability.”

As proof, he cites the roughly 20 new design wins Plexus has notched over the past two quarters.

Many competing, larger contract manufacturers, such as Flextronics International Ltd. {FLEX} and Solectron Corp. {SLR}, are also pushing hard to build up their own pre-production design and engineering offerings.

That could pose a threat to Plexus down the line.

But in the meantime, analysts say the larger competitors, while having good prospects in their current markets, will be burdened into the foreseeable future with having to produce too many low-margin commodity items, as compared with Plexus.

In addition, some analysts have expressed concern that Plexus might be facing a slowdown on the medical side of its business, where sales growth has been uneven over the past few quarters.

But Sabol says that he doesn’t expect that to be the case.

“The growth on the medical side has been lumpier,” Sabol acknowledged during a brief CNBC.com interview at the conclusion of his presentation at the Robertson Stephens investment conference. “But we’re still expecting to see 25 percent year-over-year growth in medical, based on new customer wins.”

On July 20, Plexus reported earnings of 57 cents a share for its third quarter ended June 30, on revenue of $193.1 million, up from $120.4 million for the same period a year earlier.

About the Author /

hplotkin@plotkin.com

<p>My published work since 1985 has focused mostly on public policy, technology, science, education and business. I’ve written more than 600 articles for a variety of magazines, journals and newspapers on these often interrelated subjects. The topics I have covered include analysis of progressive approaches to higher education, entrepreneurial trends, e-learning strategies, business management, open source software, alternative energy research and development, voting technologies, streaming media platforms, online electioneering, biotech research, patent and tax law reform, federal nanotechnology policies and tech stocks.</p>