Multi-Fineline: Change in strategy could prove profitable

Paul Rolfes | Jun 03, 2008 6:20am EDT | Comment

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When Motorola (NYSE:MOT) caught the cold shoulder of cell phone buyers as the faddishness of its RAZR line faded, Multi-Fineline Electronix Co. (Nasdaq:MFLX) felt the chill.

At one point, the Anaheim, Calif., maker of flexible printed circuit technology relied heavily on Motorola, which had accounted for nearly 90% of Multi-Fineline Electronix’s sales. It was Multi-Fineline’s flexible wizardry that enabled Moto to deliver the ultra-sleek RAZRs that consumers craved.

The RAZR nicks and cuts are healing at Multi-Fineline, commonly known as M-Flex, amid a management restructuring and other changes. It was a rather quick turnaround: in the January through March quarter of 2007, the company warned of a sales shortfall.

Having learned from that painful lesson, Multi-Fineline Electronix is broadening its customer base to makers of cell phones, hand-held devices and smart phones, while eyeing potential growth in medical devices and other specialties. Despite the demand rollercoaster created by the retrenching U.S. economy, the company has three quarters of positive results under its belt.

Analysts who follow M-Flex apparently didn’t find a lot to fault when results for the fiscal second quarter came out May 6. According to a Thomson Reuters survey, two of the five analysts polled have Multi-Fineline as a “buy,” with the other three calling it a “hold.”

Shares of M-Flex have held steady around $20 in recent weeks, which is less than a third of the highs seen in March 2006, when the stock topped $67. Multi-Fineline shares hit a 52-week high of $24.14 on March 12, and a low of $9.70 on Aug. 3. The Thomson median price target is $23. Shares closed Monday at $20.19.

Founded in 1984, Multi-Fineline has become a leading provider of flexible-circuit technology. M-Flex also provides end-to-end services to electronics companies, from design to production and assembly. Most manufacturing takes place in China, where it has some 800,000 square feet around Suzhou. Construction is beginning this month on a new plant that will expand capacity in about a year by $30 million in monthly sales on top of the $64 million in current monthly sales capacity.

Following the May 6 release of results for the three months ended March 31, M-Flex shares shot up 12%, and for good reason. The company said in the fiscal second quarter it had record net sales of $163.9 million, up 45% from the year before. Net income increased 240% to $10.4 million, or $0.41 a share, compared with $3.1 million, or $0.12 a share, for the 2007 period.

Gross margin during the quarter increased to 18%, compared with 11% the year before.

Multi-Fineline is expecting to post similar results for the current quarter. It noted that “key customers currently include four of the leading OEMs which manufacture portable electronic devices,” and that sales were growing for three of the four.

Reza Meshgin, Multi-Fineline’s president and chief executive, said its four key customers represented approximately 95% of net sales in the quarter, with three at 10% or more, including one that “exceeded 25% of sales during the quarter.” He said on a May 7 call with analysts that long-term plans call for a further broadening of the customer base, but for now, it will rely on those customers.

In addition to Motorola, the company said in February that it had added Apple Inc. (Nasdaq:AAPL) as a customer, and that Apple had quickly grown to represent more than 10% of M-Flex’s sales in the three months ended Dec. 31. While M-Flex has not revealed details about its relationship with Apple because of confidentiality agreements, so far observers don’t believe that the circuits are part of the red-hot iPhone.

Rising to become Multi-Fineline’s biggest customer is Sony-Ericsson, the cell-phone maker that is a 50-50 joint venture of Japan’s Sony Corp. (NYSE:SNE) and Sweden’s L.M. Ericsson Telephone Co. (Nasdaq:ERIC). Others include BlackBerry maker Research In Motion Ltd. (Nasdaq:RIMM).

In the company’s fiscal year that ended Sept. 30, Motorola represented 57% of total net sales, down from 86% in fiscal 2006. By comparison, Multi-Fineline said sales to its other customers grew nearly 200%, or $145.5 million, from the prior fiscal year.

Multi-Fineline is 55% owned by Singapore-based conglomerate Wearnes, or WBL Corp. Ltd. A marriage of M-Flex with MFS Technology Ltd., a weaker Singapore sister company that was proposed in March 2006, was rejected by WBL shareholders last July.

After M-Flex posted its most recent results, several analysts upped their price targets. RBC Capital Markets maintained an “outperform” rating but raised the target price to $25 from $21. Similarly, Needham & Co. kept its “buy” rating, but increased the target price to $26 from $20, and R.W. Baird boosted its target to $20 from $18, while keeping the rating at “neutral.”

Multi-Fineline bent under the weight of Motorola’s downturn, but it didn’t break. With its expansion plans on track, and a business strategy change, it could become a bright performer in its sector.