Fabrinet is a tech company that offers electronic manufacturing, precision optical, electro-mechanical, and packaging services in North America, Europe, and Asia-Pacific. The company provides a wide range of electro-mechanical and optical technologies to the manufacturing industry, including supply chain, printed circuit board assembly, process design engineering, integration, manufacturing, and testing among others. Most of its products include switching systems such as optical amplifiers, add-drop multiplexers, modulators network management modules for voice, video, data, transponders and transceivers, and optical cables, among many others. Fabrinet serves OEM manufacturers of modules and subsystems, optical communication components, medical devices, industrial lasers, and sensors. The company was established in 1999 and its headquarters is in George Town in the Cayman Islands. Is it a good stock?
Should You Purchase Shares on Fabrinet (NYSE: FN) Stock?
As an investor, you want to search for stocks that promise to beat the earning season, and Fabrinet may turn out to be one such company. The company’s earnings will be coming up soon, and events seem to be shaping up pretty well for its report. And this is due to favorable earnings estimate revision activities for the company, which is typically a trailblazer to the earnings beat.
Moreover, stock analysts raising estimates, just before earnings, with up-to-date information is an excellent indicator of steady trends beneath the surface for Fabrinet’s stock report. According to a Zacks Equity Research post published on Nasdaq website, the Q2 2020 fiscal earnings for Fabrinet stood at $1 per share and trounced Zack Consensus Estimate by 7.5%. Hence, this suggests that the analysts have recently increased their estimates, granting FN stock a Zacks Earnings ESP of +0.86% approaching the earning season.
Purchasing shares on Fabrinet stock will give you partial ownership of the company. Hence, your investment is put to funding the company’s operations. But if you would like to make substantial profits on your investment, the company must make enough revenue from the funds you invest. It’s thus crucial that you pay more attention to this aspect since your return on investment (ROI) is determined by internal investments and dividends to boost the business, which is only possible if the company is producing sufficient earnings. To have a clear picture of Fabrinet’s capital returns, you need to understand the company’s Return on Capital Employed (ROCE). It shows you whether the company will be growing your investment and putting you in excellent stead to sell your shares profitably.
Calculating Fabrinet’s ROCE
As an investor, you have a broad range of companies to pick from, and this typically means you have an opportunity cost in any investment you'll be making, in terms of a foregone stake in either company. Your investment will symbolize confidence that the funds invested will increase than when spent elsewhere. Hence, the business ability to increase your capital investment is crucial and can be determined by comparing the return on capital (ROC) you receive with the hurdle rate, which depends on various factors you can figure out. Therefore, let’s analyze Fabrinet’s capital returns by calculating ROCE to determine what the stock can generate from the money put in funding operations.
- ROCE (Return on Capital Employed) = EBT (Earnings Before Tax) ÷ (Capital Employed)
- Capital Employed = Total Assets – Current Liabilities
- ROCE = $98.24M ÷ (1.05B -287.16M) = 12.80%
From the above calculation, Fabrinet earned US$12.8 from every $100 you invested in a year. When you compare this to a healthy 15% benchmark, you realize that the company is unable to return a substantial amount to investor’s capital. Thus, it is unfavorable to you in case you’ve foregone other solid stocks.
But Why Have Some Investors Purchased Fabrinet’s Shares?
The Underperforming ROCE will be less-ideal for you as an investor if the company’s stock doesn't turn around for the best. However, if the capital employed and earnings improve, the company’s ROCE may rise, consequently benefiting your investment more. Due to this, it’s essential to look beyond the company’s final ROCE value to determine how individual components are performing. If you rewind three years, you’ll notice that Fabrinet’s ROCE rose improved from 9.85%, with earnings rising from $47.01Million to $98.24Million. Additionally, capital employed also experienced a slight increase, meaning relative to the capital investment, FN was able to improve its return on capital employed by driving up its earnings. Therefore, this is the reason why some investors purchased the shares.
Fabrinet’s Record Quarter
According to Fabrinet’s CEO, Seamus Grady, the company experienced “unusual business dynamics” in last year’s fiscal quarter. However, it managed to revive its adjusted earnings and revenue at double-digit rates. When Huawei (Chinese tech firm) was blacklisted, it negatively affected Fabrinet's income by almost $9Million in the quarter, since it manufactures and ships products to its Huawei customers. But despite this, it managed to offset this crisis by exceptional performance on other fronts. Optical communications revenue representing 74% of the company’s total revenue, increased by 2 percent of the 3rd quarter of $300Million. But due to Huawei, the telecom revenue went down while datacom revenue improved to mitigate the slack. Additionally, the third quarter saw impressive growth in photonics-based optical communication, silicon by a massive 10%.
The company’s bottom line received a boost due to Fabrinet’s cost-cutting efforts, and this was through reducing administrative, general, and selling expenses by 16.8% from the previous year to $13.8Million. Also, it recently launched an active initiative to maximize efficiency by reducing the workforce and space needed while increasing its output. According to Grady, Fabrinet improved its operational efficiency while minimizing cycle times for significant processes through heightened automation and eliminating activities with little value. This way, they managed to free up to 120,000 square feet of space required for manufacturing processes in the company’s Pinehurst plant in Bangkok.
What to Consider Before Purchasing Fabrinet Shares
Currently, Fabrinet’s ROCE is beyond the required level for investors. However, the company has been on an upward trend in the recent past. And this may signal a clear indication for solid ROI in the long-term. Before any decision, ROCE doesn’t imply the complete picture. You’ll need to be extra careful with other fundamental aspects such as valuation, high-performance stocks, and prospects, according to Simply WallSt. Doing this will help you determine whether Fabrinet stock is a substantial long-term investment.
Written by Bill Vix
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