Analysts foresee upturn for Molex

The past few quarters have been rough for Molex Inc., the electronic parts manufacturer and supplier based in Lisle, but analysts say the global behemoth may now be on the mend.

Combating the rising prices of raw materials and waning demand in its telecommunications division in Asia, the company has seen profit slides of 30 percent and 54 percent, respectively, in the last two consecutive quarters.

Its stock plunged more than 9 percent Aug. 2, the day after its fourth-quarter earnings per share came in 2 cents below analysts' estimates. It took more than two months for the stock to return to the prior level, about $27.

In the fiscal year ended in June, Molex earned $240.8 million, or $1.30 per diluted share, up 2 percent from $236.1 million, or $1.26 per diluted share, a year earlier. Sales rose to $3.3 billion from $2.9 billion. Analysts estimate earnings per diluted share for the current year of $1.40.

Despite its quarterly ups and downs, Morningstar Inc. analyst Rick Hanna wrote in a recent research note "the worst of the company's performance may be finally behind it."

Hanna said in an interview much of Molex's past troubles had stemmed from low demand in China and other emerging markets for the company's high-end mobile phone parts. However, he said, this may be changing, as the Chinese economy continues to grow and more consumers there obtain the buying power for higher quality phones.

This hope for high-end cell phones was voiced in August by CEO Mark P. Slark: "We believe this is the result of initial demand in the developing economies, and that these large markets will eventually transition to more sophisticated higher content devices."

China has been a double-edged sword of sorts for Molex. The company relies heavily on China both for sales and manufacturing, and 22 percent of Molex's total revenues in the 2007 fiscal year originated there.

Alexander Paris Sr., president and founder of Barrington Research Associates Inc. in Chicago, said rising commodity prices have also caused problems for Molex, and China's booming economy is partially to blame for that.

"Commodity prices have gone up substantially, particularly metal prices, and it's a big problem for any manufacturer, but more so for those in the U.S.," Paris said. "Prices are going up because we're getting more industrial demand from countries that were not industrialized before, like China. They've gone from bicycles to cars."

Molex relies on copper, gold and petroleum, which is used to make plastics.

Paris said Molex and other companies have tried to counter their rising material costs by taking advantage of cheap labor in China.

The falling price of the U.S. dollar against other world currencies also has led many commodity prices to increase, Paris said, because many commodities are priced internationally in dollars. However, the weakening dollar has in some ways been a boon for Molex because the company completes so much of its business abroad.

A total of 73 percent of Molex's revenues came from outside the U.S. in the year ended in June. As a result, the company attributed a $15.9 million revenue increase in the first quarter to favorable exchange rates brought on by the falling dollar.

Both Hanna and Paris said they expect to see a turnaround for Molex in coming quarters, especially as the company completes a global restructuring implemented in June. The restructure primarily involves streamlining the company's sales teams so employees are no longer divided into geographic sales areas and now market products worldwide.