FLEX: Sustainable Manufacturing, With NEXTracker IPO on Horizon

Alex Gates of Clayton Partners presented his investment thesis on Flex Ltd. (US: FLEX) at Best Ideas 2022.

Thesis summary:

Flex is one of the largest electronic manufacturing (EMS) firms in the world and is transitioning into a higher-margin, sustainable growth company.

Three years ago, the company hired a new CEO who instituted a turnaround plan to improve margins, customer quality, and free cash flow. Despite this repositioning, FLEX trades at less than 10x earnings, a steep discount to equally positioned peers and the market.

Renewable energy is a particular focus for FLEX. They own NEXTracker, the global market leader in solar trackers. After a delay in the IPO last year, FLEX remains committed to monetizing NEXTracker in the near term. Using similar multiples as their largest competitor Array Technologies (ARRY), NEXTracker could be worth over a third of the market value of FLEX, or $7 per share. Alex’s diligence calls with solar developers, EPC’s and advisors to sponsor equity have come back positive for NEXTracker, which could trade at a premium to ARRY in the public markets.

FLEX also has exposure to other growth sectors, such as electric/autonomous vehicles, 5G rollouts, and additional renewables (Enphase and SolarEdge are a few of many high-growth customers).

Given the high quality of the management team and the new growth/margin profile, the remaining FLEX business should trade closer to higher-value peers like Plexus. Valuing FLEX at 12x FY2023 earnings equates to a $29 stock (+60% upside), once you factor in NEXTracker. Longer-term fair value is over $40 (100+% upside), if FLEX is valued similarly to Plexus.

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About the instructor:

Alex Gates is the Director of Research and Chief Compliance Officer at Clayton Partners LLC. Founded in 2003, Clayton Partners is an opportunistic value investment firm.

Clayton manages a private investment partnership and individual separate accounts. The firm takes a private equity approach to investing in the public markets and looks to align itself with shareholder friendly management teams that focus on long-term value creation.

Alex leads the firm’s effort to find compelling public and private investment opportunities in sustainable businesses that have a positive impact on climate change. The current focus is on investments in renewable energy, bio-fuels, recycling and water infrastructure.

Alex holds a Masters Degree in Business Economics from the University of California at Santa Barbara. Prior to his graduate education, he completed a dual major BS in Economics and Statistics from Cal Poly State University. At both institutions, Alex concentrated in finance and economic modeling. He earned the Chartered Financial Analyst designation in 2015.

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