Will the Tortoise Win This Race?

Piyanka is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Jabil Circuit (NYSE: JBL), is a provider of electronic manufacturing services and solutions, providing manufacturing and designing aids to company’s worldwide. It provides integrated design and manufacturing services to firms ranging from the automotive industries and consumer goods to medical networking, defense and aerospace engineering. The services provided, are selection and procurement of components, implementation, testing and systems assembly and automation.

Founded in 1966, with its headquarters located in St. Petersburg (Florida), the company also provides products such as set-top boxes, display products as well as peripheral products like printers, globally. The company design services include Electronic Design, Industrial Design services, Computer assisted mechanical design and product validation. The company also has its aftermarket service centers that provide warranty and repair services to its manufacturing customers as well as other consumers. Jabil’s unique combination of global expertise, ingenuity, analytics and financial performance has contributed towards the success of most of the leading brands globally.

A Good Start to the Fiscal Year

Jabil reported unaudited earnings results for the first quarter of the fiscal year 2013. However, the company reported net revenue of $4.6 billion against $4.3 billion for the same period last year. With a GAAP net income of $105.8 million against $112.9 million of last year, the company’s core earnings went down to $127.8 million against last year’s $136.2 million for the same period. Therefore a net margin of 6.1% was reported for the current year. The Zacks Consensus Estimates for the first quarter of 2013 was 47 cents, which was down by 16% from 58 cents earned for the same quarter a year ago. In spite of the better-than-expected first quarter 2013 results, the scenario doesn’t seem to change much.

Reasons to Invest

Revenue rose by 5% this quarter, though with a lot of moving parts. The company’s Diversified Manufacturing Services (DMS) business has been a great success. It grew 20% in the last quarter of the previous fiscal year and now makes for 47% of the entire top line. The growth is being driven by Specialized Services under DMS, which has companies like Apple as their clients.

The company’s Enterprise and Infrastructure business grew by 17 percent, while Specialized Services was up by 51%.

However, Jabil’s increasing exposure to Apple as its new customer and the upcoming new product release (Blackberry 10) from RIMM, indicate that the company shall move forward in the near future.

Areas to be concerned

We can relate the downfall of Jabil with the high operating expenses and the weak performance of two of its customers, Research in Motion (RIMM) and Cisco Systems (CSCO). Although 80% of Jabil’s business is going strong, there are some major issues that need to be considered before investing into the company. The High Velocity business of the company, that constitutes 23% of the revenue, is in free fall mode. With a decline in the company’s core earnings, Jabil’s management is getting cautious about its mobility business.

Who’s Ahead??

Flextronics International (NASDAQ: FLEX), with EPS that improved by 33.3% in the last quarter, is tough competition for Jabil. Headquartered in Singapore, the leading Electronics Manufacturing Services (EMS) provider has announced that it will hold its quarterly conference call to discuss third quarter results on January 24. 

Another rival that needs to be considered is Sanmina Corporation (NASDAQ: SANM), which provides integrated electronics manufacturing services worldwide. With a gross margin of 7.4% and operating margin of 3.5%, the fourth quarter saw encouraging results and revenue is still estimated to grow next year.

Looking forward

Over the past ninety days, the average estimate for the second quarter has fallen from 56 cents per share to around 50 cents, indicating that the analysts are growing pessimistic about the company’s performance next quarter.  However, the Chief Financial Officer of the company is confident of the company continued outstanding performance in future estimates of operating cash flow of $1 billion by the end of fiscal year 2013. The average estimate for revenue next year is $18.26 billion and the average EPS estimate is $2.47.

I certainly believe Jabil can support a fair value on the basis of its revenue and free cash flow prospects. Therefore, I see a good opportunity for investors.


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