Watch This Stock as it Turns Around for the Better
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems like contract electronics manufacturer Jabil Circuit (NYSE: JBL) is set to sign off 2012 on a high after a tumultuous year, but this doesn’t mean you should get tipsy and start ordering Jabil shares. The company delivered a terrific beat on both revenue and earnings last week, but short-term weakness still prevails, which means there could be better opportunities to initiate a long position in the near term.
However, if your hands are itching and one of your New Year's resolutions is to buy a really good stock for the long run, Jabil might turn out to be just what you were looking for. Obviously, all of us aim to buy low and wait for that point, but if you’re ready to endure some rocky moments and stay invested, then the current level at which Jabil is trading doesn’t look too bad.
Reasons to Buy
Jabil Circuit sports a decent dividend yield of 1.7%, has delivered a 44% improvement in operating cash flow this year whilst marginally improving revenue, and trades for a pretty cheap trailing P/E of 10.44. In addition, the company is expected to grow at an impressive PEG ratio of 0.72, which is lower than its rival Flextronics International’s ratio of 0.78.
The company’s Diversified Manufacturing Services (DMS) business has been on a tearing run. It grew 20% in the previous quarter and now makes for 47% of the entire top line. This solid growth is being driven by Specialized Services under DMS, which manufactures aluminum casing for the latest Apple (NASDAQ: AAPL) iPhone.
Jabil has been making sizable capital investments in this segment to satisfy demand for the iPhone 5, which has been flying off the shelves and recently turned in its best ever performance in the U.S. market. Hence, presence of Apple as a client is a big plus for the company and enabled Jabil to beat Street estimates handsomely in the just-concluded quarter.
Going forward, the company would be making more capital investments into this segment to improve the economics of production to bring down costs and improve margins. The efforts are already bearing fruit as DMS delivered a 50 basis point improvement in gross margin last quarter. In addition, it shouldn’t be forgotten that Jabil was chosen to be the “go forward partner” by a mobility customer, which is most probably Research in Motion (NASDAQ: BBRY).
RIM is preparing to launch BB10 next month and it won’t be prudent to completely write it off right away, as fellow blogger Leo Sun argued. If RIM’s face-saving, next-generation platform is able to cut its teeth in the booming smartphone market, then Jabil would also receive a shot in the arm.
Up next is the Enterprise & Infrastructure business, which accounts for 30% of Jabil’s top line and delivered a solid performance in the previous quarter. Revenue from this segment jumped 17% from last year, which is remarkable when we consider that the industry has not been performing up to the mark due to low spending by carriers. But now, it seems that the market is ready to rebound as telcos start building infrastructure for faster networks.
Also, the company’s presence in sectors such as Clean Tech, Healthcare, Instrumentation and Industrial is worth considering as these should improve with economic recovery, even though they are under pressure as of now.
I really don’t want to dampen the mood and wish to continue with the good points about Jabil (keeping the festive season in mind), but there are a few roadblocks that shouldn’t be ignored if you are considering an investment. Even though almost 80% of Jabil’s business (DMS + Enterprise & Infrastructure) is going strong, its High Velocity business, constituting 23% of revenue, is in free fall mode.
Revenue from the segment declined 20% in the previous quarter due to a fall in handset volumes. Presence of customers such as RIM and Nokia hasn’t helped Jabil arrest the decline in this segment, but with BB10 on the anvil, we might be in for a slight upside. Jabil’s management is also looking forward toward a gradual upswing in the mobility business, but are being “cautiously optimistic” about its prospects.
And then there’s the possibility of subdued margins for at least the first half of 2013 as Jabil invests to improve its production capacity. The company expects to spend around $500 million this fiscal year, and its cash hoard of $1.03 billion should come in handy in this endeavor. There might be initial hiccups before costs get normalized, but Jabil’s management expects to deliver better margins and earnings in the second half.
If you have the patience to let Jabil improve its DMS business and the stomach to digest the pain its High Velocity business might give, then you should consider getting some Jabil shares for your portfolio. The company is getting better slowly but steadily, and there will be potholes on the way. Hence, Jabil Circuit is a stock for those with a long investing horizon and a single-digit forward P/E of around 7 might justify your purchase further, along with the other positives mentioned earlier.
TechJunk13 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!