Flextronics (FLEX) - Get Report, a leading domestic electronics manufacturing services (EMS) company, just delivered a quietly excellent quarter. Revenues, profits and the new business pipeline were all strong despite the macro headwinds. At 8.5 times estimated earnings with a 12% free cash flow yield, and much higher profit margins yet to come, the stock is a steal.

And yet the stock is somewhat subdued for such solid fundamentals and such low valuations. That's because Flextronics, like many tech companies, beat the earnings number solidly, but guided up only modestly. That's the company's typical conservatism -- it guides conservatively and beats nicely. Investors might be focusing on the subdued guidance, but that's a mistake.

I have liked Flextronics since it announced the highly accretive Solectron acquisition. Many analysts/investors were skeptical. It was one of the most ambitious EMS integrations ever undertaken, and Flextronics pulled it off with flying colors. The Solectron/Flextronics combination gives the company powerful global vertical integration, customer/industry diversification, and 800-pound-gorilla capabilities in customer offerings/services. That's a big deal.

In the past week, three EMS companies have reported better-than-expected profit margins in the space. It's a sign that the consolidation of the EMS industry is finally generating better pricing and profitability in the industry. It bodes well for the sector as the global infrastructure boom in technology gains traction in many developing economies.

And as good as Solectron has been as an acquisition, the best deal is yet to show its payoff. That's the Arima deal. Arima is an original design manufacturer (ODM) that makes mobile computers. Till now, Flex had been uninvolved in this space. With Arima, it's in. And it should ramp to big numbers quickly.

Many of the Taiwanese ODMs, which make mobile computers for the big guys like

Hewlett-Packard

(HPQ) - Get Report

and

Dell

(DELL) - Get Report

, are branding their own computers to compete with their customers. And that gives Flextronics the opportunity to ramp big and quick if it can execute well for its customers, with whom Flex will never compete.

So here, one can buy the leading EMS company with a strong case for double-digit growth at 8.5 times rising Street estimates. That's too cheap for such a quality company, especially when two competitors trade for 10 to 12 times estimated 2008 profits. A peer P/E ratio of 11 or 12 times on 2008 profits would deliver a 40%-50% trade. If 2009 turns out to be another 10%+ growth year with more margin expansion, the stock could work higher still. Flextronics is an excellent company with very healthy upside potential.

At the time of publication, Marcin was long Flextronics, although positions may change at any time.

Robert Marcin is the founder of Defiance Asset Management, a private investment management firm. Client accounts managed by Defiance Asset Management often buy and sell securities that are the subject of commentary by Marcin, both before and after it is posted. Under no circumstances does this column represent a recommendation to buy or sell stocks. This column is intended to provide insight into the financial services industry and is not a solicitation of any kind. Neither Marcin nor Defiance Asset Management can provide investment advice or respond to individual requests for recommendations. However, Marcin appreciates your feedback;

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