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A double-whammy has shellacked the shares of Merix (
MERX
), which makes advanced, multilayered printed-circuit boards (PCBs) for the communications, computer, and test-and-instrumentation industries. The sharp pullback in technology stocks has hurt Merix' stock, but since the company is also a big part of the communications sector, its shares got hit even harder in the market's current downdraft.
Trading as high as 70 a share in late September, Merix tumbled to 38 by late October. It has since inched up to 40. The stock had been a fast gainer since June, when it was just 13. Is Merix headed back down to its lows?
Not by a long shot, says David Buhrstan, who has been accumulating Merix shares for the Small Cap Growth Fund that he runs at Northern Trust in Chicago.
HIGH-END PROVIDER. On its own fundamental steam, Merix, whose chief customers include Intel (
INTC
), Cisco (
CSCO
), Nortel (
NT
), Hewlett-Packard (
HWP
), and Lucent Technologies (
LU
), could run back up to 70 over the next 12 months, says Buhrstan. But he sees another factor that could push the stock much higher: The likelihood of a buyout.
Apart from the strong earnings growth that he and some analysts project for the company, the sophisticated products that Merix turns out for the high-performance segment of the electronics industry make the company an attractive target for the likes of Tyco International (
TYC
) and large rival Flextronics International (
FLEX
), says Buhrstan. Both companies, he notes, have rapidly grown through acquisitions.
PCBs are complex interconnection equipment used for basic electronic components, including microprocessors and integrated circuits. Merix' PCBs "rank among the industry's most complex," says Thomas A. Moro, an analyst at William Blair & Co., because the company "focuses on enhancements and efficiencies to stay ahead of increasing customer demand for sophisticated solutions." This is how Merix has positioned itself, he adds, to be a "preferred supplier" for high-growth applications.
STRATEGIC FIT. For Tyco, a diversified manufacturing and service company, the cost of a Merix acquisition would be peanuts. Tyco, which posted sales of $29 billion last year and has a market valuation of $93.3 billion, also makes PCBs. But its boards are more commodity-oriented and geared for the low-end electronics markets, including personal computers. Tyco, says Buhrstan, would logically want to get into the high-margin, high-end PCB market. Toward that goal, Merix would be an ideal strategic fit for Tyco.
Flextronics, a leading provider of contract electronics-manufacturing services to original-equipment makers in the PC, telecom, and consumer industries, also makes PCBs. Like Tyco, Flextronics' PCBs are mainly designed for the low-end market. But in April, the company acquired DII Group, which makes PCBs somewhat similar to Merix' high-performance products. "For Flextronics to be more vertically integrated in PCBs, it would have to widen its top-line boards," says Buhrstan.
Flextronics is another deep-pocketed company that could gobble up Merix with little difficulty. With sales of about $5.7 billion, Flextronics has a market cap of $13.6 billion, vs. Merix' sales of $155.9 million and market value of $515 million.
WORTH $80 A SHARE? For the year ended May 31, 2000, Merix earned 72 cents per share on that $155.9 million. In its first fiscal quarter ended Aug. 26, 2000, it posted earnings of 54 cents a share on sales of $51 million. So Buhrstan figures that for all of fiscal 2001, the company will earn $3 a share on revenues of $232 million. For fiscal 2002, he sees earnings of $3.15 on sales of $301 million.
In a buyout, Merix could well be worth 80 a share, or $1.1 billion, figures Buhrstan. With or without a deal, he figures Merix wil be a big winner.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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