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It’s FLEX time again


Dear Mr. Berko:

I manage my own account and need your advice. I think I should buy 300 shares of Flextronics International Ltd. I purchased 300 shares in 1994 at $21 and regretfully sold them in late 1997 at $36, making a $4,500 profit. The company has changed a lot in the past six years.

What do you think about my purchasing 300 shares again? How high do you think the shares can go in the next three to four years? I can afford some risk. But before I go out on a limb, I would feel more comfortable with an opinion from you.

H.Z., Joliet, Ill.

Dear H.Z.:

You can put Flextronics (FLEX-$16.50) in your portfolio, and I think 300 shares sounds about just right.

FLEX makes and designs advanced electronics for original equipment manufacturers of hand-held devices, computers, wireless and information technology infrastructure and consumer electronics and for the industrial, automotive and medical industries.

This sector seems to have emerged from the bottom of a very bloody cycle both at home and abroad. The slump of the past three years saw demand collapse, which painted the sector with red ink. Many issues imploded, falling to between 70 percent and 95 percent of their high market values.

However, month-to-month revenue comparisons have been trending higher. December was the ninth month of consecutive revenue growth. So it appears that this sector has turned the corner and FLEX looks like one of its promising companies.

Personal computer growth has held up well, with good growth in microprocessors and dynamic random access memory, which reflects the early stages of a business upturn as well as seasonal “back-to-school” demand. The consumer sector has also stayed strong, thanks to DVD players, hand-held devices, digital cameras and the growing popularity of electronic games. In fact, the suits on Wall Street are anticipating an extremely strong rebound through 2007.

This rebound is not consumer-specific, but it seems that corporate America has a massive bottled-up “wishlist” that may generate significant new commercial and industrial demand. The potential over the coming two to four years could be enormous.

FLEX’s revenues have grown nicely every year since 1993, and they continued to grow during the bloodbath after the bubble burst. Unlike most of its competitors, according to the estimable Value Line, Flextronics continued to make money in 2000, 2001, 2002 and 2003, when most companies in the industry were sliding down a hill of horrors.

Revenues in 1993 were $123 million and are expected to exceed $14.5 billion this year. Some Wall Street analysts believe that FLEX’s revenues could grow to $22 billion in three to four years, with earnings that could approximate $2 a share.

So with blue chip customers like Dell Inc., Alcatel S.A., Hewlett-Packard Co., Microsoft Corp., Motorola Corp., Siemans Corp., Sony-Ericcson and Xerox Corp. contributing 65 percent of sales, FLEX should have the potential revenue and earnings power to move its share price to the low $40s in the coming four years.

If management can improve its net profit margins to 5 percent, as they believe they can, then FLEX may be a good long-term growth stock.

Common stock represents 76 percent of capital and its board split the stock 2-for-1 three times between 1998 and 2000, when it reached a post-split high of $44 a share.

During the “bubble years,” FLEX traded at an average price-earnings ratio of 38, which, in my opinion, was egregiously high. An average P/E of 22 is certainly more acceptable. Though I consider the shares a bit on the risky side, I’m very comfortable confirming your decision to purchase 300 shares.

If FLEX’s earnings rise to $2 a share, as expected, a P/E of 22 would put the share price at $44. That’s a nice gain if you can get it. However, I must disclose some of our clients own FLEX.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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