Flextronics Swings to Profit, but Shares Slump

Updated from July 19

Flextronics ( FLEX) boosted year-over-year revenue in its first quarter by 25% and turned last year's loss to a profit of 13 cents a share, the electronics contract manufacturer reported after the closing bell on Monday.

But guidance for the next two quarters apparently offered insufficient upside vs. expectations and the stock was being pummeled on Tuesday, recently off $1.13 or 8%, to $12.93.

Flextronics earned a profit of $74.3 million, or 13 cents a share in the June quarter, compared with a loss of $289.7 million in the same quarter last year, under generally accepted accounting principles.

Excluding restructuring and other items, the company earned $78.3 million, or 14 cents a share on sales of $3.88 billion; analysts polled by Thomson First Call were expecting a 14-cent profit on sales of $3.9 billion.

Despite concerns over the health of the cell-phone market, sales to Sony Ericsson were up 40% sequentially, accounting for 15% of Flextronics' overall revenue.

Looking to the second quarter, the company told investors to expect a pro forma profit ranging from 15 cents to 18 cents a share on sales ranging from $4.1 billion to 4.4 billion; analysts were expecting 17 cents a share on sales of $4.2 billion.

For the third, or December quarter, the company expects to earn a pro forma profit ranging from 21 cents to 24 cents a share on sales ranging from $4.4 billion to $4.7 billion; Wall Street was forecasting EPS of 17 cents on sales of $4.8 billion.

The tepid guidance surprised analysts, "given management's tone throughout the quarter -- including midquarter update and management meetings," wrote Deutsche Bank analyst Chris Whitmore, whose morning-after note was entitled "Expectations Ahead of Reality."

Whitmore trimmed his sales forecasts for the company but maintained his buy rating, saying investors can find value in Flextronics. Deutsche Bank has an investment banking relationship with Flextronics.

CEO Michael Marks was upbeat about the company's prospects during a conference call following the announcement, and angry over the company's poor stock performance. "We're unbelievably bullish about our business but every time we say something good, our stock goes down," he complained. "I don't know where they analysts get that stuff."

Marks acknowledged that the overall technology-spending environment, marked recently by a series of profit warnings and misses in the software sector, is troubling. But he saw no signs of a downturn for Flextronics or the electronics contract manufacturing sector (EMS). "This is not going to be the peak of period for earnings for the EMS industry," he said.

Despite landing a lucrative deal to handle some $2.5 billion worth of manufacturing each year for Nortel ( NTsymbol)on June 29, Flextronics shares have dropped about 12% (not counting Monday's after-hours slip) since then, a drop that the company's management finds "mystifying," Alexander Blanton, who follows the stock for Ingalls & Snyder, wrote in a note published last week.

"This is the largest and, in our opinion, the most significant and all-encompassing win in the history of the EMS business. We see little negative in it," said Blanton, whose company does not have a banking relationship with Flextronics.

Some investors may have thought the company had already started making money from the deal and were disappointed when it didn't boost sales or earnings, but in fact, it won't be accretive for several quarters, Marks said. "Right now, it's a cost."

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