Lehman: Jabil - A Stock Opportunity?
Feb 20, 2003
Investment conclusion
In this market, we all know it has been rather challenging to make money or count on a company hitting its guidance. In the near term, we believe there could be a positive long opportunity with Jabil Circuit shares.
Summary
The simple thought is that the company’s February quarter is on track, and given this environment, that might seem impressive. However, in our view what is outstanding is that management’s guidance implies revenue growth of 41% y/y and 9% q/q and EPS growth of over 100% y/y to $0.15 that gets us excited (based on our 2Q03 expectations of $1.16B / $0.15). In addition, we believe forward guidance will not be lowered, but suggested with optimism for top line q/q growth of 4% and at least a one cent increase bottom line. Our estimates for 3Q03 are revenues of $1.21B and cash EPS of $0.16.
Revenues and cash EPS estimates for FY03 stand at $4.69B and $0.63, respectively.
We maintain our 1-Overweight rating and reiterate our $17.50 price target, which is 26x our CY03 EPS estimate of $0.68.
A Stock Opportunity?
How and why is Jabil doing well in this very difficult environment? We partially attribute the remarkable performance to the benefits of being one of the first EMS providers to begin working on its turnaround after experiencing difficulties early in the tech downturn (Dec 2000). Thus, the company now profits from actions taken a couple years ago to motivate the troops, win new business and cut costs.
Fundamentally, Jabil’s management team has been prudent in running the business. The following strategies have contributed to the company’s operational success:
• Limited Deal Participation During the Tech Bubble Years. For the most part, the company did not actively participate in the hectic growth of the tech boom with numerous OEM divestitures and acquisitions, thereby not purchasing assets at what turned out to be inflated prices. This benefited Jabil when overall business slowed and prices dropped so that the company could pick up deals on more reasonable and more realistic terms.
• Less Deals Led to Less Restructuring. Since the company participated in fewer transactions than its peers in an aggressive marketplace, there has been less restructuring to take out superfluous capacity and headcount. Furthermore, there were not as many cultures to blend and IT systems to integrate (Jabil runs on a worldwide SAP platform), which are typical hurdles of
acquisitions.
• Better Customer Support. We believe the company has done a good job throughout the years of sticking with its core strategy of superior customer service. With this, we believe Jabil has either increased its business with, or has won new programs, from both HP and IBM, among others.
EQUITY RESEARCH
• Solid Financial Operations. Management has maintained a solid focus on cost/expense controls, balance sheet metrics and cash flow. Thus, the company often leads the industry as best in class on most of these measures.
In conclusion, we believe the February quarter is tracking to plan. Recent new business wins and deals add visibility to the May quarter and overall FY03. We believe the Philips transaction provides attractive end market diversification (i.e., consumer exposure should grow from 8% in FY02 to 20+% in FY03E). Finally, the shares have traded off with the general market and fallen 22% since a recent high in January and 31% from a November high, as investors remain skittish on the potential of a war in Iraq. At $15.64, or 23x our conservative CY03 EPS estimate of $0.68, the stock is not “dirt cheap,” but at a level which is low enough to allow a reasonable amount of
appreciation to our $17.50 price target. |
