Investment Holding Profile: FLEX Ltd.

Investment Holding Profile: FLEX Ltd.

With the Fed making headlines again, it's easy to get caught up in the extreme short-term market volatility. But it’s important to remember that when you buy a stock, you don’t own a ticker, you own a piece of a business. To distract you from the market's crazy swings, we are profiling the businesses that make up the largest holdings in our SMID Cap Core Strategy.

Today we’re highlighting FLEX Ltd. (FLEX), another top holding as of September 30, 2022.

FLEX Ltd. (FLEX)

Background

FLEX Ltd. is an end-to-end manufacturer specializing in designing, building, and supplying products for other companies across the globe.

Investment case

FLEX offers enormous investment potential as industry demand strengthens and business dynamics improve.

Due to the massive pandemic-related sourcing issues, companies are redesigning their supply chains. We believe FLEX will play a growing part in that redesign, helping companies source their products — especially as products become more digital and complex, such as digital healthcare solutions and electric vehicles.

Historically, the contract manufacturing industry has been very competitive, but these dynamics seem to be improving. The diversity of the customer base is increasing and manufacturers are creating various niches of expertise, leading to less head-to-head competition. Improvements in margins at FLEX (and other contract manufacturers) suggest that the shifting dynamics are translating into higher profits.

Management believes it can earn an EPS of $2.65 in three years after selling its NEXTracker solar business (worth $3 to $6 per share). With high single-digit sales growth, improving margins, and mid-teens EPS growth, we think there is room for multiple expansions.

Risks

While the improvements are encouraging, there is a chance business dynamics do not continue to improve as expected. Furthermore, FLEX’s business is economically sensitive. The stock could underperform if demand weakens in an economic downturn.

If you have additional questions about FLEX Ltd. (FLEX) or our SMID Cap Core Strategy, please contact us. Next time, we’ll profile our holding Affiliated Managers Group (AMG).

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Investments highlighted were selected based on objective, non-performance-based selection criteria. Names are subject to change.

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