Plexus Corp.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Plexus Corp. is a global electronics manufacturing services provider, specializing in design, manufacturing, supply chain and aftermarket services for complex products and systems across various 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.

Plexus’s Moat Rating: 2/5 - Limited and Niche-Dependent While Plexus does not possess a traditional wide moat, it exhibits some competitive advantages that earn it a ‘narrow moat’ rating.

Economies of Scale: As a large EMS provider, Plexus benefits from economies of scale, allowing it to operate more efficiently and offer competitive pricing to its clients. However, this scale benefit isn’t unique, and competitors with larger scales like Foxconn may be able to undercut them.
Customer Relationships: Plexus has built long-term relationships with customers in highly regulated industries, creating some stickiness due to the time it takes to establish the relationships and get qualified as a manufacturer. Moreover, a large portion of their customer are from highly-regulated industry like Healthcare, Aerospace, and Defense, where the cost and risk of switching can be relatively high. The level of customization and the required quality also acts like a switching barrier. However, these customer relationships are not impossible for competitors to replicate over time.

Overall, the moat for PLXS is not a wide and defensible one. The company doesn’t offer differentiated products and the barrier for competitors isn’t high, meaning the company might have to compete heavily on price. The moat is largely dependent on the customer and industry and is a somewhat dependent niche one.

Legitimate Risks That Could Harm the Moat and Business Resilience:

Dependence on Key Industries: The majority of Plexus’s revenue comes from a few key sectors, particularly healthcare, aerospace, and defense. A downturn in these sectors can significantly affect demand.
Rapid Technological Change: The electronics industry is subject to constant innovation, requiring continuous investment in new technologies. Failure to adapt quickly to these changes could impair Plexus’s competitiveness.
Pricing Pressure: The EMS industry faces price pressures. If Plexus fails to control costs or offer differentiated services, it may lose market share to lower-cost competitors.
Supply Chain Disruptions: The company’s financial and operating performance is largely dependent on a good functioning supply chain. Problems, like the chip shortage during the COVID-19 Pandemic, can lead to lost revenues or production, significantly harming its growth and profitability. This issue is particularly relevant as the company depends on a supply chain network that often spans across various nations, and different international events can cause a negative effect to their supply chain.
Customer Concentration: Although Plexus has numerous customers, they generate a large portion of revenue from the top ten customers. A significant portion of revenues is reliant on these key customers, meaning if any of these customers decide to look elsewhere for the manufacturing of their products, PLXS would significantly lose profits.

Business Description and Financials:

Revenue Distribution: Plexus’s revenue streams come from its four key segments: the Americas (AMER), Asia-Pacific (APAC), and Europe-Middle East-Africa (EMEA). Additionally, the sales are segmented into Industrial, Healthcare/Life Sciences, Aerospace/Defense, and Communications. While it services many different industries, a large majority of their revenues come from Healthcare. The company generates roughly around 40%-50% revenues from the US region. By segment, Healthcare generates around half of their revenue. A majority of their revenue is attributable to long-term supply contracts with these clients.
Industry Trends: The electronics manufacturing services industry is in the midst of significant growth, driven by factors such as the increasing complexity of electronic products, an increase in the outsourcing trend of manufacturing processes, and the growing demand for advanced technology across various sectors.
Margins: The company’s margins are quite thin, like other businesses in the EMS sector. Gross profit margin averages around 12-14%, operating margin around 4-6% and net income margin is often below 3%.
Competitive Landscape: The EMS market is highly competitive, with a few very large global players like Foxconn, Jabil, and Flex. However, the rest of the competition is highly fragmented, with many smaller and niche players. Companies in this industry compete primarily on cost, but also on reliability, turnaround times, service quality, customization and delivery options.
What makes Plexus different?: Plexus differentiates itself by focusing on complex, high-mix, lower-volume production and offering integrated services, spanning design, manufacturing, supply chain, and aftermarket support. They also focus on higher quality output. This contrasts with the higher volume and lower cost manufacturing focused upon by players like Foxconn. Additionally, the company focuses on industry-specific expertise, catering to companies that have very stringent demands and requirements.
Financials in depth: Plexus’ financials have been somewhat volatile in the last few years. Although revenue has been stable or slightly increasing, their profits have been unstable, mainly caused by supply chain issues and high costs of transportation and other manufacturing expenses. Their Q1 2024 earnings call showed a positive outlook. Revenue and profits are projected to grow in the future due to an improvement of their operational efficiency, and the stabilization of supply chains that have been in disarray since the pandemic.
Latest Earnings: In its latest earnings (Q1-2024), Plexus exceeded expectations for earnings, reporting a diluted EPS of 1.31, above projections of 1.08. Management is still cautious of demand volatility, however, supply chain improvements and new opportunities are expected to help profitability and growth. For the current quarter, Q2-2024, diluted EPS projections are still high at around $1.56 to $1.61.

The company’s management seems confident in a 15% long-term EPS growth, as their investments for future capabilities will start to materialize in growth and profitability.

Understandability: 3/5 Plexus’s business model is relatively straightforward to understand as a provider of contract manufacturing services, but the complexity of the supply chain, the intricate nature of electronics manufacturing, and the varying nuances of their end markets do add some complexities. Most aspects of the business are easily understandable but the deeper knowledge of the supply chain and logistics is important to achieve a deeper understanding.

It is easy to see the products they make, which includes high-end products for various industries.
Understanding of the company’s value creation is quite straightforward, which is in lowering costs of clients while creating high quality products for them.
Understanding the moat based on scale and switching costs is also quite easy to understand.

Balance Sheet Health: 4/5 Plexus has a relatively strong balance sheet:

While not having the highest cash reserves, the company holds around $300 million in cash equivalents.
Debt-to-equity is a manageable 0.45, meaning the company’s debt is below its equity. The interest coverage is healthy at 14x.
Working capital of 118 days seems like a negative as it means they take a long time to receive payments, however, it does highlight that they have strong, dependable customers.
Quick ratio (measures how well a company can meet its short-term financial obligations) is good at 1.4.

Concerns/Controversies and Problems:

During the COVID-19 pandemic, Plexus, along with other manufacturing companies, experienced significant supply chain disruptions and increased costs. As a result of these issues, the company had to cut back production and had more delays. While this has largely stabilized in the recent periods, these issues are something to note.
In the last few years, the company has seen its earnings go down due to higher costs of production and operation. However, this has been noted as a short-term drag, and management has guided that it will be fixed by increased volume, efficiency, and revenue growth.
While Plexus has a decent business model, their focus on highly-regulated industries and complex manufacturing often means they can’t compete on price. So, any major event that pushes prices down can have a material effect on profitability.
The company’s relatively low levels of liquidity might have to be watched if they keep spending on acquisitions or there is a down turn in their sectors, which would greatly limit their financial flexibility.

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