Don’t Jump onto Jabil Circuit Yet

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Contract electronics maker Jabil Circuit’s (NYSE: JBL) third quarter earnings report was a mixed bag. Although its results came in line with Mr. Market’s expectations, a light outlook for the current quarter suggested that the company was in for a difficult time ahead. But a few positive takeaways from the conference call saved Jabil the blushes and instead the stock recorded a gain of almost 2% in late trading. However, there’s more behind the headlines which calls for our close attention.

Jabil’s top line remained relatively calm and consistent at $4.3 billion from the year-ago period, but its various businesses were in see-saw mode. While its diversified manufacturing services business grew 22% from last year, and now forms 44% of Jabil’s top line, the high velocity segment crashed 20%.

Uncertainty ahead

A number of factors affected Jabil in the quarter and held it back from posting substantial growth. The company supplies photovoltaic (PV) modules to solar manufacturers and this weighed in on its performance. This particular business was destined to take a hit since the solar industry has been in a distressed state for more than a year now. The industry had first grown at a rapid pace but ultimately burned down with issues such as oversupply and the dumping of cheap modules by Chinese manufacturers. Furthermore, the company doesn’t expect that demand in this sector will strengthen anytime soon and this niche will continue to be depressed.

The next area of concern comes from Jabil’s enterprise and infrastructure business which dropped 4% from last year and contributes almost one-third to the company’s revenue. Jabil counts networking behemoth Cisco (NASDAQ: CSCO) and leading PC maker Hewlett-Packard (NYSE: HPQ) among its clients. Now, both of them are on sticky ground.

Cisco signaled that technology spending will remain muted this year as telecom companies are holding back their spending due to tense economic conditions. This sparked an industry-wide panic and Cisco took a beating that day along with the others. On the other hand, HP’s problems have been very well-documented and its stock hit a 52-week low last month. The company is trying to affect a turnaround after a slew of blunders by its management such as thoughts of spinning off its PC business. Even though HP’s future might seem optimistic, I believe it’s still a long way before the company can really get back its groove, and a lot of that will depend on how CEO Meg Whitman steers it. Hence, it comes without saying that as long as both Cisco and HP are not doing well, Jabil might also not see much upside in its top line.    

A Faux Pas Jump?

Now we will come to the reason why Jabil’s shares gained despite sounding out a depressive guidance. The company indicated that it has been chosen as a “go forward partner” by a mobility customer while its competitors have been dropped by that particular customer. Jabil’s management said that “our mobility customer in the high-velocity sector has been under duress as they have grappled with the declining sales and leadership changes, while making preparations for a critical launch of an important new product platform.

These lines can be perfectly attributed to BlackBerry maker Research in Motion (NASDAQ: BBRY), which is preparing to launch its next OS later this year. But, even though Jabil enjoyed its time under the sun due to this piece of news, I would advise investors to not go over the top. RIM is a has-been player in the smartphone space and is about to face a litmus test when it releases BlackBerry 10. If RIM fails yet again, which in my opinion is quite likely, Jabil would again come back to the ground.

Final Thoughts

While Jabil’s diversified manufacturing business is going well and the enterprise business might fall in line as the industry improves, it is the high velocity segment which might hold it back. Having mediocre phone makers such as RIM and Nokia on its client rolls is not going to help, but more focus on set-top boxes, point of sales, printing, and automotive products will probably enable Jabil to fix this segment as well.

There is nothing spectacular about Jabil at the moment, although it might do pretty well after it addresses its problems. The stock has been a dog this year and it still has a few roadblocks ahead. Thus, it would make sense to keep an eye on Jabil Circuit from the sidelines and jump onto it when signs of a turnaround surface.

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