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Flextronics has been in an overcrowded business where the customer called the shots. But Cramer said that’s about to change.
Flextronics [FLEX
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] operates in the electronics manufacturing services market, where the company builds the products that firms like Cisco Systems [CSCO
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], Hewlett-Packard [HPQ
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] and Sony [SNE
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] sell to consumers. The problem has been that EMS is full of competitors cutting prices to best each other, leaving Cisco and the like to play one company off another.
But with Flextronics’ purchase of rival Solectron, this EMSer might have “set the stage to turn its entire dismal industry into a force to be reckoned with,” Cramer said.
The deal put FLEX just behind Hon Hai, the top firm in the biz. So now, according to Cramer, the rest of the industry will have to consolidate in order to compete with these two top players. This wave of mergers and buyouts should give EMS businesses much more pricing power.
Still, Cramer said he likes FLEX just on the Solectron acquisition alone. An integration process that the Street thought would take 18 months to 24 months is going to take only six now. That means cost savings will come much faster than expected, and analysts will have to revise their earnings estimates upward to accommodate. Cramer called this a “classic great acquisition story where the estimates are too low,” and that usually means big gains for investors.
The stock’s cheap because those estimates haven’t caught up with it yet, and because the Solectron buyout could give EMS the jolt it needs. FLEX trades at just under 10 times next year’s earnings, but the stock could see 25% earnings growth over the next two years.
“That’s insane,” Cramer said. He recommended Homegamers buy Flextronics.
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