JBL: Q3 In-Line; News Re: Q4 No Cause for Panic; Raising
2000 Est's
Salomon Smith Barney
Wednesday, June 16, 1999
--SUMMARY:--Jabil Circuit--CEMs/EMS
*JBL announced 3Q99 earnings results, which matched consensus forecasts.
*Growth rates for 4Q99 may be less than previously anticipated due to
last-minute design delays on new products from two customers. Impact of
these potential delays could reduce Q4 results by 10% (worst case).
*Shares sold off sharply in the aftermarket. Having closed in regular
session trading at $54, the stock went as low as $41 after-hours.
*We view sell-off as an over-reaction; such push-outs are not uncommon.
*Balance of the c/call was very positive, as JBL gave a detailed, upbeat
outlook for FY2000. Net, net, even assuming light Q4, we are raising est's
for FY2000. JBL also announced 4 new customer wins, including Lucent.
*Lowering our estimate for 4Q99 by $0.03, to $0.30, and raising FY00 est. a
like amt., to $1.49. Raising our 12-18 month price target from $49 to $56.
--EARNINGS PER SHARE--------------------------------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
Actual 08/98 EPS $0.25A $0.26A $0.22A $0.17A $0.90A
Previous 08/99 EPS $0.25A $0.28A $0.29A $0.33E $1.15E
Current 08/99 EPS $0.25A $0.28A $0.29A $0.30E $1.12E
Previous 08/00 EPS $N/A $N/A $N/A $N/A $1.46E
Current 08/00 EPS $N/A $N/A $N/A $N/A $1.49E
Previous 08/01 EPS $N/A $N/A $N/A $N/A $N/A
Current 08/01 EPS $N/A $N/A $N/A $N/A $N/A
Footnotes:
--FUNDAMENTALS--------------------------------------------------------------
Current Rank........:1H Prior:No Change Price (6/15/99).....:$41.50
P/E Ratio 08/99.....:37.1x Target Price..:$56.00 Prior:49.00
P/E Ratio 08/00.....:27.9x Proj.5yr EPS Grth...:30.0%
Return on Eqty 98...:N/A% Book Value/Shr(99)..:6.04
LT Debt-to-Capital(a)14.4% Dividend............:$N/A
Revenue (99)........:2005.0mil Yield...............:N/A%
Shares Outstanding..:85.6mil Convertible.........:No
Mkt. Capitalization.:3552.4mil Hedge Clause(s).....:#
Comments............:(a) Data as of the most recently reported quarter.
Comments............:
--OPINION:------------------------------------------------------------------
Jabil (JBL) announced today (6/15) its 3Q99 earnings results, which
matched consensus forecasts. The company said that growth rates for 4Q99
may be less than previously anticipated due to last-minute design delays
on new products from two customers. The impact of these potential delays
could reduce expected fiscal fourth quarter revenue and earnings per
share by as much as 10% (worst case) from prior expectations. Company
officials indicated that delays in growth on these new programs would be
recovered in the fall. The stock sold off sharply in the aftermarket.
Having closed in regular session trading at $54, the stock went as low as
$41 after-hours.
We view this sell-off as an overreaction to the news of the push-outs of
the new programs. Such push-outs are not uncommon, which is why CEM/EMS
providers typically do not announce new program wins until they have
begun production. In these cases, however, the two customers, the Bay
Networks division of Nortel and an unnamed notebook computer customer,
were announced almost a year ago, because they were deemed material to
JBL's operations (both have the potential to account for 10% or more of
JBL's sales). Both were projected to reach volume production in 4Q99.
Due to these design changes, the growth curve is pushed into 1Q00.
We do not view this news as in any way a disaster. In fact, the balance
of the conference call was very positive, as JBL gave a detailed, upbeat
outlook for FY2000. Net, net, even assuming a lighter-than-expected Q4,
we are raising our EPS estimates for FY2000 from $1.46 to $1.49, as JBL
gave guidance for above-plan growth in revenue, operating income and
EPS. We have raised our revenue estimate for FY2000 as well, from $2.69B
to $2.93B. This growth is based on JBL's projection of sharply higher
sales in both the computer and communications segments in FY2000. That
was not all of the good news, as JBL announced four significant new
customer wins, including Lucent Technologies. We don't expect material
amounts of Lucent work in FY2000, but the fact that JBL has been selected
as one of a small group of suppliers to serve an important company in the
communications segment is significant.
In our view, the positives far outweighed any negatives associated with
JBL's earnings release. We are raising our price target from $49 to $56,
and we reiterate our 1H, BUY rating on the shares. Long-term investors
should use the weakness in the stock price, if it persists, to take a
position in a core holding in the CEM/EMS space.
For the quarter, JBL reported revenues of $522.5M, up 69% year-to-year
and just below our $525M estimate. Net income was $24.4M or $0.29 per
share, which matched the Street and our estimates. Net income for the
corresponding quarter of 1998 was $0.23 share. Gross margin was 11.4%,
which exceeded our estimate by 20 basis points. A higher utilization
rate in JBL's US plants accounted for the better-than-forecast margin.
The recent secondary offering of shares by Jabil leaves it with an
extremely solid balance sheet and plenty of dry powder to fund additional
growth. The offering resulted in approximately $200M in gross proceed to
Jabil. Jabil has paid down the approximately $80M on its revolving
credit facility and now has a debt-to-capital ratio less than 10%, along
with nearly $160M in cash. We will not be surprised to see Jabil use
these funds for additional creative acquisitions of OEM assets, such as
the Hewlett-Packard LaserJet operations in Boise and Bergamo, Italy,
which JBL acquired last year. Indeed, we believe JBL is actively
considering several such acquisitions. Any such acquisitions would be
incremental and are not factored into our estimates. Notably, company
officials predicted on the conference call that JBL will establish a more
significant presence in Asia in 12-24 months.
CUSTOMER SPLIT -- Jabil does not identify its top customers on a
quarterly basis. For FY98, Cisco, 3Com and HWP were the sole over-10%
customers at 21%, 18% and 11% respectively. We believe that only Cisco
and HWP will be over-10% customers in fiscal 1999 at approximately 20%
and 30% respectively. In addition to Lucent, new customers announced
this quarter include Electronics for Imaging, which should commence
production in 4Q; an unnamed high-end datacom customer, and an unnamed
European OEM, for which JBL will manufacture wireless data collection
equipment. This latter program should begin to ramp in the 2HFY2000 .
We estimate the HWP business yielded $150M in revenue in Q399 and will
yield $575M for FY99, and will be the primary driver of the peripherals
segment, which will comprise about 1/3 of Jabil's business for fiscal
1999 and 1/4 in fiscal 2000. The communications segment is experiencing
sharp, above-plan growth rates, as is the PC segment, which, driven by
the new notebook customer, should be particularly strong beginning in
FY00. Company officials provided customer segment estimates for FY99 and
FY00 as follows:
FY99(E)
communications 44%
computers 11
peripherals 33
auto 7
consumer 3
others 2
FY00(E)
communications 50%
computers 20
peripherals 25
auto/others 5
The integration of the HWP acquisition has gone extremely well, and
management has noted in the past that its experience with this, its first
OEM divestiture, has left it feeling positively inclined toward
additional acquisitions. JBL hopes to diversify the customer base served
by the HWP plants by FYE99. The company has agreed to purchase a 50-acre
campus location in Boise and will greenfield a new site there, which will
relieve capacity constraints at the present site, which has no physical
room to expand. Operations will be maintained in the present Bergamo,
Italy location until conditions dictate otherwise, but it also is
capacity constrained.
The Guadalajara plant has been an unmitigated success, and has been
solidly profitable for the past three quarters. Jabil is in the process
of adding two business units there, one for its new notebook customer and
one for a communications customer. Construction on a 125,000-square-foot
addition was completed, on schedule, last month, and the line for the
notebook customer is in place. JBL now has 280,000 square feet for
printed circuit board assembly. JBL will soon be breaking ground on
another approximately 120,000 square-foot addition, which will be
dedicated to box build and customer fulfillment. JBL has sufficient space
for at least five other buildings this size on its 25-acre complex.
The new San Jose facility -- approximately 182,000 square feet -- has
begun initial production for several existing customers as well as new
customer Network Appliance. We also understand that production for EFI
will begin there this Fall. The San Jose plant turned profitable in the
last month of 3Q. Jabil's well-regarded advanced engineering group has
also taken residence there. JBL predicts that demand will be strong for
the mid-volume, turnkey manufacturing the plant will provide, and that it
will gain new, local customers who require local production.
Finally, JBL announced that it has leased a facility near Boston, and
intends to greenfield a new plant there. Production should begin in the
leased facility in the fall. This will be a mid-volume, turnkey site as
well, which JBL will be able to use to service its large, principal
customers as well as an incubator for additional business in the
Northeast, where JBL has not previously had a presence. We expect some
modest start-up costs for the new facility in 1Q00, and have modeled it
accordingly. |
