What do you do when the market undervalues your stock? Flex Ltd. (NASDAQ:FLEX) is correcting this by buying back shares. During the August Annual General Meeting, the firm’s shareholders approved purchase of outstanding shares.
Usually, buyback of shares is strategic such that a company gets to contract the value of the shares. If there is too much in the market, control over value is more in the hands of investors. As such, short sellers could have an outsize effect on the value of the company’s stock.
Flex Ltd. working to take control of value
Particularly, the buyback program will repossess up to 20% of outstanding shares. In other words, the company wants to purchase shares worth $500 million.
Interestingly, the company has approximately $3.1 billion worth of shares since it started buyback in Q1 FY2011. This figure represents amount sent to buy 370.6 million shares up to Q1 FY2019. The company retired all the shares acquired.
However, the program is taking time to have a real effect on the share’s value. Looking at measures of momentum like the relative strength index (RSI), it is apparent that the stock is still struggling. The RSI is an oscillator that measures the strength of a share compared to overall market performance.
Particularly, values below 30 indicate very weak momentum while values higher than 70 show high strength. For Flex Ltd., the RSI reading is 34.91. This is to say that the stock is picking up towards strength.
The shares oversold
Interestingly, this indicator enables the investor to determine an oversold or overbought situation for a stock. For instance, values below 30 indicate an oversold situation while values over 70 indicate overbought situation.
Understanding whether these two situations is important towards estimating the future direction of the stock.
Another way to look at this is by using the Williams Percent Range (Williams %R). With this indicator, it is easy for the investor to determine whether to buy, hold or sell a stock. For Flex, the Williams %R reading stands at -91.80.
Usually, values above -20 indicate an overbought situation while those below -80 show an oversold situation. From the foregoing, it is possible now for the investor to decide. A reading of -91.80 simply tells the investor of an oversold situation for Flex shares. As such, it could be a good time to buy.
In addition the 200-day and the 50-day moving averages indicate paint a positive image of the future performance. Particularly, the MA (200) price is $13.52 which is higher than the MA (50) price of $9.50. As such, the long term growth prospects of the stock are higher.
The share buyback program might not be having an immediate effect on the share price but revenue is increasing. In the Q3 2018 filing, the firm reported an earnings per share (EPS) value that tops consensus estimate. In particular, the EPS for Q3 was $0.29 against an estimate by Thomson Reuters which stands at $0.28.
Further, the firm’s revenue also beat the estimates. For the quarter, the firm reported $6.71 billion against analyst estimate of $6.81 billion. Therefore, it is clear that the increased EPS is as a result of the buyback program, not increased revenue.
A farther examination of the Q3 results indicates that the company is underperforming both the industry and the market. Particularly, in the past one year, FLEX returned -55.9% value to shareholders against an industry average of -9.4%. The US market on the other hand returned -1.5%.
Also, a closer look at the firm’s future cash flow estimates indicates the stock is highly below its real value. Interestingly, the current price stands at $7.86 against the future cash flow value of $11.06. As such, this could be an excellent sign for investors to buy.