Jabil Continues to Prove Worthy of Patience

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

I’ve said this before and I’ll say it again - regardless of how good a company's management may be, betting on their ability to successfully transition an existing model to “a new growth opportunity" is a huge risk. For every success story where a transition appears smooth such as Adobe, there are nightmarish outcomes such as Hewlett-Packard where “we keep going back to the drawing board.

However, there are also examples such as Jabil Circuit (NYSE: JBL) where the market views its transition as “not a great changeover yet, but the signs are positive.” Nonetheless, for some investors, these “positive signs” have not been enough to prevent Jabil’s stock decline.

Jabil has made 3 new 52-week lows in October alone. For some investors, “hiccups” in the company’s transition has proven too much to bear. It also didn’t help that Jabil missed Q4 estimates by 4 cents. However, with a solid Q1 performance, Jabil just may have bought itself some more time. Will it spend it wisely?

The quarter that was

For the period ending in November, the company reported first quarter revenues of $4.6 billion. Diversified Manufacturing Services (DMS) business grew 20%. This is important to note since it is Jabil’s fastest growing segment and the area in which the company wants to fully transition.

Also noteworthy is that DMS now accounts for 47% of Jabil’s overall business - in other words, in terms of the transition, so far so good. The company also reported a 17% increase in Enterprise & Infrastructure business. But its High Velocity business segment didn’t fare so well – shedding 20% year-over-year.

Likewise, profitability was mixed. The company posted $170 million in operating income, which was flat year-over-year but broadly expected. The company earned 51 cents per share, or 3 cents lower from the year-ago quarter with core diluted earnings per share arriving at 61 cents.

These numbers were far from breathtaking. But they were good enough to convince investors that management has an excellent pulse on what it needs to do to successfully transition the company to the DMS business. The Street agreed - sending the shares up over 7%. For the performance management has this to say:

“As a result of this outstanding performance and the ongoing strength of our balance sheet, we were able to return $148 million in capital to shareholders during the first quarter of fiscal year 2013 through dividends and share repurchase. We see this positive performance continuing and continue to estimate operating cash flow of $1 billion in fiscal 2013.”

Moving forward

Although things are progressing well now, the company’s future will still rest on how successful this changeover proves to be. Today, Jabil is the world’s third largest producer of electronics components. But the company has other ambitions. Jabil wants to build up its capabilities in other areas such as DMS, which just grew 20% in the quarter – so it makes sense.

Plus, the company has Apple (NASDAQ: AAPL) as one of its biggest customers – another added motivation. In the fourth management warned investors about program ramp up difficulties. Presumably, these were related to the iPhone 5. Apple did report its own production challenges during the quarter, but these have since been resolved. Is there a connection there? It’s certainly plausible.

Absent a breakdown of DMS production, it’s possible that Jabil’s 20% growth could have been positively impacted by stronger than expected iPhone sales. But we’ll find out in a month when Apple reports on the holiday quarter. But Jabil is not all about Apple.

The company also has other prominent customers such as Research in Motion (NASDAQ: BBRY) and Hewlett-Packard (NYSE: HPQ). And although the macro climate has not been kind to neither RIM and HP, Jabil is still growing market share as evident by its 24% and 20% growth in its DMS business in two consecutive quarters.

Too, with the market expecting a strong rebound in RIM on the launch of BB10, Jabil should see increased demand if BlackBerries start taking off as some analysts believe. The same can be said about HP. As enterprise spending fully rebounds, Jabil will also benefit from any growth that HP experiences. This will make Jabil’s current revenue guidance of $4.3 billion for Q2 extremely conservative.

Bottom Line

On the basis of the current quarter, I can say that Jabil shares are fairly valued today. So far, the company's transition is going far better than expected and management deserves a lot of credit for seizing a new growth opportunity - better yet, one that is working.

As it stands, Jabil has earned the benefit of the doubt and deserves more time for management to realize the company’s true value. In the meantime, patient investors who are not adverse to risk should do well buying the stock at these levels. $19 today can easily become $25. 

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!

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