Foxconn and the Value of Forgiveness
Foxconn investors are a forgiving bunch.
After years of being kept in the dark about, well, almost everything, shareholders continue to favor the stock of the iPhone assembler's Taipei-listed flagship, Hon Hai Precision Industry Co.
Now, even as Hon Hai is set to announce its first annual drop in net income since the financial crisis, bulls have driven the stock to a level last seen when the original iPhone was on sale.
An 8 percent climb in the past month -- primarily since the Lunar New Year holiday, which ended Feb. 2 -- runs in tandem with a rally in the stock of chief benefactor Apple Inc., which closed at a record on Monday in New York.
That's to be expected because, as I have written before, suppliers often give a hint of what to expect from the world's most valuable company. None more so than Hon Hai, which tends to move in lockstep with Apple on a weekly or monthly basis.
The rally does make Hon Hai look fairly expensive on a two-year view, in common with fellow Apple manufacturers Wistron Corp., Pegatron Corp. and Compal Electronics Corp.
Yet put this in the context of its decade high and Hon Hai is actually quite cheap, compared both with peers and with its own historical price-earnings ratios. The stock is trading at around 11.7 times forward 12-month earnings, while a basket of peers including Wistron, Pegatron and Compal plus Inventec Corp. and Quanta Computer Inc. is at a median 13.2 times.
Many believe that Hon Hai might decouple from Apple. On the positive side, there's its success in turning around Sharp Corp. That could be overshadowed by the fact that the iPhone designer plans to rely more heavily on services than on hardware -- good for Apple shareholders, bad for Hon Hai -- while a revamped Sharp still needs Apple to buy its display panels.
Yet eternally optimistic Hon Hai shareholders see what they want to see, whether it's more Apple orders, a rebound in the smartphone business, a pickup in China's growth or incentives and subsidies from the new U.S. administration.
No matter how little information Foxconn shares with investors, and its continued failure to meet growth targets, Chairman Terry Gou and his team can bet on the value of forgiveness.
To contact the author of this story:
Tim Culpan in Taipei at firstname.lastname@example.org
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Paul Sillitoe at email@example.com