Upgrade Sparks Plexus Shares

A Citgroup analyst sees good things from the recent earnings report.
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Shares of electronics manufacturing company

Plexus

(PLXS) - Get Report

surged higher Thursday after Citigroup upgraded the stock, seeing more upside.

The Neenah, Wisc.-based company's stock closed Thursday at $33.38, up 7.9%, adding $2.45, on more than twice its average volume.

"We are increasing our target price for PLXS to $35 from $25 resulting in a 10%-15% positive upside and accordingly upgrading the shares to Hold from Sell," Citigroup Investment Research analyst Jim Suva wrote in a note released Wednesday night. "We acknowledge that we missed the share increase from $22 to $30 when the company reported better-than-expected earnings and gave initial indications that it won a defense contract."

On Feb. 6 the company revised its first-quarter earnings report upward to reflect net income of $13.7 million or 31 cents a share, up from $3 million or 7 cents a share a year earlier.

After additional due diligence on the new contract, Suva believes there is "still more upside to the shares." Citigroup does and seeks to do business with companies covered in its research reports.

The company has traction in its defense/security/aerospace business, Suva wrote. Currently, that area is 5% of Plexus' revenue, or $16.4 million, but he estimates it could grow to over 10 %, and the company could carve it out as an independent segment by the end of 2006.

"As the Department of Defense requires that defense products be manufactured in the U.S. due to security concerns, this is a benefit to Plexus as it is able to fill previously underutilized capacity in North America," Suva wrote.

New analysis of supply-chain inventories has calmed fears of "industry overbuild" heading in to the seasonally slower current quarter, Suva added. Inventory levels for the current quarter are much better positioned compared with previous years. In addition, a newer Plexus' facility in Penang, Malaysia, was "very profitable" in the first fiscal quarter.