FLEX Ltd.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Flex is a global manufacturing partner specializing in design, engineering, manufacturing, and supply chain solutions across a variety of industries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Flex, formerly known as Flextronics, is a large contract manufacturer. It operates as a manufacturing partner for several industries, including communications, enterprise, industrial, consumer devices, and healthcare. This is a very diverse business and can be complicated to understand given its numerous divisions, but at its core, it’s a manufacturing powerhouse. Let’s delve deeper:

  • Revenue Distribution: Flex has five reportable segments:
    1. Flex Agility Solutions (FAS): includes production of printed circuit boards, data infrastructure, cloud infrastructure, and communication infrastructures.
    2. Flex Reliability Solutions (FRS): specializes in industrial manufacturing, automotive electronics, and healthcare products.
    3. Flex Lifestyle Solutions (FLS): caters to consumer devices, including mobile, audio, and high value consumer electronics.
    4. Flex Sketch-to-Scale Solutions (STS): designs and manufactures products and solutions for various industries
    5. Netsol Solutions (NS): is focused on services including supply chain and logistics
  • Industry Trends: The manufacturing sector is witnessing a shift towards digitalization and supply chain resiliency as companies move manufacturing closer to end consumers. The current macroeconomic situation with its high inflation, increasing wages, and supply chain issues are making it harder to keep costs down and to source materials. Companies are trying to diversify their supply chains and also look for manufacturing partners to produce in different geographies.
  • Margins: In their latest quarter, Flex has reported an operating margin of 4.9%, which is decent, but has been historically lower. Operating margins tend to vary based on the company’s ability to execute and the pricing power it has with its customers.
  • Competitive Landscape: The contract manufacturing industry is highly competitive, with firms like Foxconn, Jabil, and Celestica competing for contracts. They have to be on top of operational efficiency, production quality, and cost management. This results in limited power overpricing. Flex also has to be on top of technology and innovations in order to get chosen over the other rivals and to stay relevant in the future.
  • What Makes Flex Different: Flex is a bit different than the competitors above. It operates through a sketch-to-scale model which includes designing manufacturing and logistics all in one package. This provides an increased value proposition to their clients, which in return results in stickier customers. They also boast a huge, diversified base across various sectors and geographies, making them less prone to cyclical downturns in a particular industry or location. Another point of strength for them is the wide range of offerings, being able to design from scratch, manufacture, and finally ship it using their logistic network.
  • Other Relevant Information: FLEX seems to be a key manufacturer for most of the world’s technology products. It also has a big presence in Asia and has a large scale advantage there. With the recent events in the supply chain it has also developed manufacturing footprints in Europe and North America. The company is also investing in automation and digital capabilities, to try to further reduce their operating costs, so it’s a key focus area of the company.

Financials Deep Dive

  • Revenues: Flex’s revenues are mainly derived from its manufacturing services. In the last fiscal year 2023, they made $29.13 billion in revenues, a slight decrease from 2022 which was 26.8 billion. In the past, growth was mainly driven by the communications and enterprise business, but the current macro environment has shifted to consumer devices and automotive. The majority of the company’s revenues are derived from their FAS (27%) and FRS (41%) segments, however, revenues were somewhat muted across all sectors in FY 2023
  • Profitability: Flex’s profitability, defined as the net profit margin, is hovering at 2.4% in fiscal year 2023. Their margins are very slim and are quite volatile due to the macroeconomic issues. The net income was $698.8 million in 2023. It had a huge decrease over the 2022 net income of $1058 million and is concerning for the shareholders. If we look at the historical operating margin, we see they have averaged 3-4%, with 2023 being slightly below that average.
  • Balance Sheet Health: In the balance sheet, their total assets are at 18.7 billion, a increase of about 1 billion from 2022. Of those 18.7 billion, 3.7 billion is cash or cash equivalents. Total liabilities are at 11.13 billion, resulting in net equity of 7.45 billion. Current assets are at 10.19 billion versus total current liabilities of 7.57 billion showing it has enough liquidity in the short-term, but it would help if they further reduced debt. Historically their debt to equity ratio has been fluctuating within 1-2.
  • Recent Concerns and Management Discussion:
  • The management has reiterated their focus on driving free cash flow and have a history of good capital returns. However, they need to be mindful of the economic conditions and keep costs down. * The management has stated that the issues in their supply chain have been stabilized, and are hoping for improved profit margins in the future.
  • They are focusing on a diversified manufacturing footprint, and have invested substantially in regions such as Mexico and Eastern Europe, which would help them reduce dependency from China and other areas of the world. They are also focusing on automation and digital investments to reduce costs.
  • The company is emphasizing on innovation and are focusing on making strategic investments in key technology trends.
  • They have said that they were expecting better long-term performance in F2025 and beyond as some of their current headwinds start to dissipate, which is quite encouraging.

Moat Rating: 3/5

Flex possesses a narrow moat due to a couple of reasons. First of all, the company operates in a tough industry and is not able to command a premium over the other players. The margins are tight and fluctuate. Second, their business model is scalable, meaning it is not easy for any other company to replicate and have their global reach. Thirdly, the company benefits from higher switching costs in the manufacturing process, where they design the products for their customers and make it hard to switch to a competitor.

Risks That Could Harm The Moat

  • Technological Obsolescence: The speed of development in electronics and tech can result in major shifts in how products are made and the materials they are made from. Failure to adapt to that change will hurt them badly.
    • Pricing Pressures: As competition intensifies, firms may struggle to maintain current levels of profits or growth.
    • Customer Concentration Risk: Having some important customers for a large percentage of revenue, will make Flex extremely volatile if the customers decide to switch or cancel contracts. The dependency on a few customers poses a risk.
    • Supply Chain Disruptions: This can hurt the business badly since they are dependent on the stability of their materials and components.
    • Macroeconomic Conditions: Economic downturns can reduce the demand for their services and products.

Understandability: 4/5 Flex is a business that is quite complicated due to its diversity and operations across various industries. But, after breaking down each part of the business and understanding its revenues, competitive positioning and drivers of value creation, it can be understood by an average investor.

Balance Sheet Health: 4/5 Flex has a good balance sheet with sufficient cash and manageable debt levels. Their liquidity appears reasonable, with current assets outpacing their liabilities. However, they must reduce their debt to improve their balance sheet health further.