News from the USA

16 March 2017


Plexus Corp. (PLXS) – Buy, PT $63.00 (Last Close $55.44) Please click here for the full report with disclaimers

Well Poised for Accelerating Growth

INVESTMENT HIGHLIGHTS: In the realm of EMS, we believe PLXS remains a stand-out name in terms of its strategic approach, model and current positioning for growth that should outpace its peers in the near and long-term. As we look later into F17 and then F18, we expect revenue momentum to ramp up into double-digit growth, owing to a particularly large set of wins, a record funnel, and the return to strong operational execution. In the big picture, business is improving in a material way and regardless of any 1-2qtr timing shifts that technically could occur but are not expected. Consequently, we reiterate our Buy.

·         Positive investor meetings. We hosted investor meetings with PLXS management on 3/7 and 3/8 in Boston and the Midwest, and we came away positive on the state of business with reinforced viewpoints on our Buy-thesis. In the grand scheme, we expect PLXS to move back into a growth phase over a multi-year period and remain confident that the recent set of wins over the past few quarters (in addition to a record opportunity “funnel”) should provide solid support. Among key questions during meetings was whether PLXS will truly accomplish the resumption of sustained growth. Management’s viewpoint was “Yes” (with Medical/HC leading way) although acknowledging that a sizeable number of new program ramps in the back end of F17 inherently present complexity/risks if timing has slight shifts (more an OEM decision than PLXS execution). As we step back and focus on the big picture, we fully expect ramps to ultimately materialize, and encourage investors to consider the substance of what is behind management’s large growth views on way to a $3B+ run rate.

·         Could Trump policy considerations actually present a positive impact to this global manufacturer? A few interesting thoughts suggest “Yes”.

The new administration has brought many questions to the EMS space, and ambiguity remains fairly strong until more definitive policy is put into place. However, a few key topics could ultimately have a positive impact.

First, tax reform as it relates to repatriation could help bring back significant cash (over $400M stranded in Asia), and this potentially opens multiple doors: (a) aid incremental domestic investment such as in equipment purchases/upgrades (especially if border tax & domestic manufacturing pressures accelerate as PLXS has up to ~$5-600M additional rev capacity avail in US); (b) supports additional return of cash to shareholders in repurchases or potential ongoing dividend (under consideration).

Second, Defense budgets seem more likely to accelerate (sub-driver #1) while administration is also pushing for more efficient spending (sub-driver #2 as this is a material outsourcing value-prop). Third, Healthcare – could see the suspended medical device tax officially be removed and open up NPD and investment (and thus need for EMS svcs) among emerging players. These factors are clear positives and should also benefit PLXS better than most peers.

Sean K.F. Hannan
Needham & Company, LLC
(617) 457-0906

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