Why Jabil Looks Too Cheap To Ignore

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For its lack of sex appeal in the eyes of investors, shares of Jabil Circuit (NYSE: JBL) has become cheap – reaching levels too attractive to ignore. Yet this may remain the case for some time. Though the company supplies components for tech giant Apple's (NASDAQ: AAPL) red-hot iPhone 5, it can’t win investors away from the market's darlings. Nonetheless, the recent slide of its stock presents a new opportunity for investors looking to exploit a market overreaction.

A quarter that was not good, but could have been worse
Until recently, investors were torn on the company’s prospects. After reaching $23.95 in mid-August, the stock has lost as much as 30% to its most recent close of $17. Concerns about its execution continue to be its biggest drawback. Unfortunately, its most recent earnings report did very little squelch those fears.

For the period ending Aug. 31, Jabil reported revenues of $4.3 billion and fiscal year revenue of $17.2 billion. Its operating income totaled $144 million, or $0.39 per share on a GAAP basis. The company said that excluding amortization of intangibles, stock-based compensation, and distressed customer charges, operating income was $175 million, or $0.54 per share. Though its EPS fell slightly below estimates of $0.58, overall, its report was in line with expectations.

Understandably, its bottom-line miss concerns investors. But the level of chaos within the entire electronics market suggests that the company performed as well as can be expected. Not only did revenue show a 1% improvement from 2011’s results, but Jabil also experienced a 14% growth in its Diversified Manufacturing Segment.

Nonetheless, the company did acknowledge its EPS disappointment. To which CEO Timothy Main said: "a challenging new program ramp in its Specialized Services sector." Although it’s unconfirmed, speculation suggests that Jabil's “new program ramp” is related to the build of the iPhone 5, which is now known to be experiencing supply chain problems.

Moving forward
Program challenges with Apple aside, investors were not pleased with Jabil’s revenue guidance, which management cut by 3% for the fiscal first quarter. The board of directors also authorized the repurchase of up to $100 million worth of the company’s stock, but that was not enough to prevent investors from driving Jabil's shares down 10%. But its fundamentals have not changed – not to the extent of a 30% decline in value.

What’s more, Jabil is still growing market share and attracting new customers, which helped the company grow its Diversified Manufacturing Services business by 24%, despite a tough macroeconomic climate for its large customers such as Hewlett-Packard and Research In Motion.

On the other hand, Jabil's attracted prominent clients in the health care sector, such as Boston Scientific and Phillips. This affirms the company’s commitment towards broadening its market in industries not known for outsourcing. Likewise, management remains optimistic about Jabil’s ability to remain competitive, expecting earnings to grow in the range of 5% to 10% in fiscal 2013. 

Bottom line
In terms of a resolution to the iPhone 5-related challenges, It’s just a matter of time. As Warren Buffett would say, “Buy when others are fearful.” These though times for Jabil are often what investors need to profit off the fears of others. As a value investor, I have come to understand that every now and then, a “shaky quarter” or two are necessary to realize the sort of value that I crave. Likewise, I think investors overreacted with Jabil’s selloff. At $17 with a forward P/E of 5, Jabil's stock just looks too cheap to ignore.


rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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