Keeping the faith

Foxconn and the Value of Forgiveness

Hon Hai is rallying like Apple even as it misses targets.
At Closing, April 25th
163.65 USD

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.

Foxconn Falls

Hon Hai is set to post its first decline in annual profit since the 2008 financial crisis

Source: Bloomberg

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.

On the Up

Foxconn's Taipei-listed Hon Hai Precision enjoyed a strong rally over the past few weeks

Source: Bloomberg

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.


Hon Hai's monthly share price swings follow those of Apple quite closely

Source: Bloomberg

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.

Pricey Fruit

Shares of Apple suppliers look to be getting a little rich compared to recent levels

Source: Bloomberg

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.

A Bargain

Hon Hai is now trading at a modest multiple compared with where it's been

Source: Bloomberg

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.

Missed Target

Hon Hai sales fell last year, failing to meet Chairman Terry Gou's own growth goal

Source: Bloomberg

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.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Tim Culpan in Taipei at

    To contact the editor responsible for this story:
    Paul Sillitoe at

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