Should You Be Patient With This Stock?
Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There was a pretty slim chance that contract electronics manufacturer Jabil Circuit (NYSE: JBL) would turn in a spectacular third-quarter earnings report and it wasn’t surprising when its guidance fell behind expectations once again.
Although the company did beat analysts’ estimates, it was the least that it could have done since they were already pretty low. Investors looking for some upbeat comments from management would have surely been disappointed with Jabil’s outlook, but it seems that there was a silver lining as well.
A silver lining somewhere?
Surprisingly, shares haven’t done too badly as one would ideally expect after the report was released last week. Maybe, the company’s decision to follow a restructuring plan to cut costs via layoffs is probably keeping investors optimistic (however ironic it might be), or even the few bright spots in a couple of its businesses might have provided hope to the hopeful.
But, the question is, what next for Jabil? Given the fact that the stock has had a good run over the past couple of months, appreciating over 20% since mid-April, many might be thinking of exiting their long positions to book some profits.
Given the sluggish state of Jabil’s business, it might be the right thing to do. But then, a patient investor would look at the company’s relatively cheap valuation, decent dividend yield, benefits from a recent acquisition, and enticing customers, and might decide to stick with the stock. Let’s see if there is enough reason for the patient investor to stick with the stock.
A high risk/high reward business
I’ll begin with the company’s High Velocity segment, which accounted for 29% of revenue in the previous quarter and jumped 23% from the year-ago period. The reason why this segment performed this well can be found in my preview of Jabil’s earnings, where I’d stated that the ramp up of BlackBerry’s (NASDAQ: BBRY) latest phones would be a tailwind for Jabil Circuit.
It indeed turned out to be the case as is evident from the segment’s results and Jabil expects the momentum to continue going forward. The company is looking at a 15% jump in revenue on a year-over-year basis in the ongoing quarter from the High Velocity segment as devices running BlackBerry 10 are probably selling well.
We’ll get to know more about BlackBerry’s sales when the company releases its earnings, but reports suggest that the BlackBerry Q10 has been doing well. Analysts have been upgrading the stock after channel checks as they believe that the strength of Q10’s sales will offset the loss in steam of the Z10. However, it remains to be seen how BlackBerry’s handsets do in the long run so as to keep Jabil’s High Velocity business afloat.
Just last year, when BlackBerry (then Research in Motion) was in a period of transition and didn’t produce any phones, Jabil’s High Velocity business wasn’t doing well. So, investors need to keep a close eye on BlackBerry and comments over the next conference call to see if the Canadian smartphone maker has enough fuel in the tank to power Jabil’s business higher going forward.
Thus, dependency on BlackBerry might be a good thing only if BlackBerry 10 sells well or else, Jabil risks losing steam in High Velocity.
Standing solid here
Next, let’s turn our attention to the Diversified Manufacturing Services (DMS) business, which contributed 40% to revenue and has been in the spotlight for various reasons. Revenue from this segment dropped 4% from last year, but a 10% jump in Specialized Services acted as a cushion for the DMS business.
Now, it is this Specialized Services segment through which Jabil manufactures the aluminum casing for Apple’s (NASDAQ: AAPL) iPhone. Jabil had manufactured the casing for the iPhone 5 last year and its margins had to take some serious dent in the process. Now, Apple is readying itself for the next iteration of the iPhone and Jabil should ideally see better revenue going forward and help arrest the decline in revenue in the overall DMS segment.
Moreover, Jabil is on the verge of closing its acquisition of Nypro. Now, Nypro is a manufacturer of precision plastic products and I would take my chances when saying that Jabil, which ideally doesn’t go out and make big acquisitions, might have spent $665 million on the company to bolster its position so that it can land the contract for a cheaper iPhone.
According to Pegatron, the new assembler of Apple products, the smartphone behemoth is preparing a cheaper iPhone model to tap the opportunity it has been missing out so far in the budget-conscious emerging markets. Now, this might have probably led Pegatron to hire 40,000 workers as it would work to assemble a cheaper iPhone, which Apple would probably bring to market next year if we are to go by various rumors going around.
Now, the presence of Apple as a customer would certainly be a boost for the DMS business, but the Clean Tech business has been under pressure since last year and continues to be so. A recovery can be expected going forward but it’s more of a “wildcard” as management states. Similarly, Instrumentation hasn’t done well either as industrial recovery has been soft. However, the company is seeing a recovery, although I won’t count too much on it now.
Thus, Specialized Services is carrying the weight of DMS and investors would have to wait for the other two in the segment to click.
Finally, we come to the Enterprise & Infrastructure business, which made up 31% of revenue in the previous quarter and grew 4% from last year. Jabil is expecting a consistent performance from this segment, and also expects the operating margin of the business to rise. Now, given the fact that telecom and data center spending seems to be doing pretty well this year, as evidenced by the results of other component suppliers, I would expect this side of Jabil’s business to continue performing well.
Thinking on a sum-of-parts basis, I think it would make sense to keep Jabil in your portfolio as the company’s end-markets do have potential to get better. The High Velocity segment looks like a risky play and investors should keep an eye on it. DMS has done well and a recovery looks to be in motion there, while Enterprise & Infrastructure should see secular growth.
A cost-cutting program should support earnings in the long run, while a forward P/E of just 7.6 along with a dividend yield of 1.60% looks enticing. But, if you’re the conservative type and are wary of Jabil’s bottom line woes, then you might consider taking some money off the table and play with the rest.
Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of 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!