Why Jabil is a Buy Ahead of Earnings

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

It's easy to look at shares of Jabil Circuit (NYSE: JBL) and see a stock that is undervalued. Deciding on whether or not to buy them is anything but easy. The company is in the midst of a very important transition. Although Jabil is one of the best brands in the electronics manufacturing service (EMS) business, the company has bigger ambitions. And it seems that these goals come at a cost.

The company wants to build up its capabilities in other areas such as diversified manufacturing, where one of its biggest customers is Apple (NASDAQ: AAPL). Although Jabil’s management is more than capable of executing this shift, I worry that the company’s aggressiveness in this area may slow down its momentum in its core business.

Also, there have been concerns about Jabil’s program ramp – presumably related to the iPhone 5. On the other hand, that Apple has recently eradicated its iPhone 5 production problems should be an encouraging sign for OEMs. With Jabil due to report fiscal first-quarter 2013 earnings on Wednesday, investors are looking for confirmation that not only is the company heading in the right direction, but also (and perhaps more importantly) its recent profit miss was an aberration.

What to Expect for the First Quarter

On Wednesday, analysts are expecting Jabil to report $0.47 in earnings per share, which will be 16% decline year-over-year. But analysts appear more optimistic about the company’s revenue target. For the quarter sales are projected to grow 2% year-over-year to $4.41 billion with full-year revenues is expected to arrive at $18.15 billion.

As noted above, for Jabil, profitability has been a major concern as evident by the last two quarters where net income have declined – including a dip of 27% in Q4. This was disappointing, but not so much when investors looked deeper into the numbers. The company did acknowledge EPS was abysmal and it was attributed to “a challenging new program ramp in its Specialized Services sector” – this according to its CEO, Timothy Main.

Nonetheless, revenue still showed a 1% improvement from 2011’s results. What's more, Jabil logged a 14% growth in its Diversified Manufacturing Segment. Ah, now it makes sense. In other words, this is the reason why the company is aggressively moving in this direction. The only concern here is, how well will it work and will this be a “putting all your eggs in one basket” type of a situation.

Moving Forward

Although the company remains a risk from an execution standpoint, there’s still a lot to like here. For instance, it is certainly a positive that Jabil has such close ties with Apple. But the company also has other prominent customers such as Research in Motion (NASDAQ: BBRY) and Hewlett-Packard. And although the macro climate has hurt the latter two companies, Jabil is still growing market share as evident by its 24% growth in its DMS business.

Another area to keep an eye on is the growth that RIM and HP may enjoy if the economy improves in 2013 - particularly for RIM. The company can become a major catalyst for Jabil if investors embrace BB10 as the company hopes. So far the market has taken a “wait-and-see” approach. But RIM’s recent earnings have trended in the right direction – beating estimates by reporting a net loss of $0.45 per share versus a loss of $0.46.

Nonetheless, there are many that are expecting BB10 to be a compete bust. But the Success of BB10 won’t be known until the company reports on its performance for at least two full quarters. So rushing to judgment may not be the right play here. But if RIM can steal any market share at all, Jabil should see some benefit.

Bottom Line

"Mid-life” business transitions are never easy – much less for companies dealing with issues with profitability. But if one company can pull this off it is Jabil. It can easily be said that management should remain steadfast in its core business, focus on growth and forget about diversification.

On the other hand, I have crucified companies for not doing this. So I can’t have it both ways. Jabil deserves the benefit of the doubt and patient investors who are not adverse to risk should do well buying the stock at these levels. $18 today can be $25 to $30 in the next 12 month.

rsaintvilus is long AAPL and has no positions in the other 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus