Jabil's caution also its strength
The Daily Deal / December 19, 2002 Thursday
HEADLINE: Jabil's caution also its strength
BYLINE: by Sarah Cohen
HIGHLIGHT:
The electronics manufacturer disdained the tech acquisition frenzy - and may be better off for it.
BODY:
The current financial strength of contract electronics manufacturer Jabil Circuit rests primarily on the many deals the company didn't do during the tech-boom years. Yet the Saint Petersburg, Fla.-based company's future may well rest on the deals it does do this year, analysts say.
Chris Lewis, Jabil's chief financial officer, concurs on both counts. He says that Jabil held back from the contract manufacturing "land grab" during the boom times because the company considers the management of growth as important as growth itself.
"Organic growth is the most sustainable way to maintain a business," he explains. "When you're growing past 30% a year, growth becomes difficult to manage. It detracts from the value you're creating with customers."
Jabil's revenues increased by 50% or 60% annually during the boom without buying assets, Lewis says. In contrast, Jabil's main competitors were buying up companies left and right around the world to push year-on-year revenue growth.
Jabil's top competitors - Solectron, Sanmina-SCI Corp., Flextronics and Celestica - all cut handfuls of billion-dollar transactions during and immediately after the tech boom. They believed they had to become bigger and bigger to accommodate more business.
In 2001 alone, San Jose, Calif.-based Sanmina bought SCI Corp. of Huntsville, Ala., for $5.5 billion in stock and assumption of debt, Milpitas, Calif.-based Solectron bought C-Mac Industries Inc. of Montreal for $2.7 billion in stock, and Celestica of Toronto bought Omni Industries Inc. of Singapore for $890 million in stock. These were only a few of the scores of deals done by Jabil's competitors between 1999 and the end of 2001.
Today, these companies are suffering.
"Those contract electronic manufacturers that made serial acquisitions during the boom years are struggling to a much greater degree then Jabil," says Tony Boase, an analyst with Saint Louis brokerage firm A.G. Edwards & Sons Inc. "Jabil has the best balance of low-cost to high-cost facilities among its peers, with 42% of its footprint in those parts of the world where labor is cheapest, like Eastern Europe, Mexico and China."
Boase adds that the weakest of the top-tier contract manufacturers, Sanmina and Solectron, bought a lot of suboptimal, high-cost facilities during the boom to win business, which left them with a much a smaller footprint in low-cost areas. The upshot, says Kevin Denney, an analyst with New York investment bank Brean Murray Co., is that Jabil has recorded less restructuring charges than its competitors.
"Other top-tier contract electronics manufacturers have averaged between $600 million and $700 million in restructuring charges this year," he said. "Jabil's going to write off about $125 million in all."
This leaves Jabil well positioned to do deals now, when the price of potential targets should be at rock bottom. Jabil is buying assets this year because its growth has slowed to less than 5% on an annual basis, Lewis says. "We're taking this period of slower growth as a time to reposition ourselves," he says.
Jabil entered the consumer electronics and medical manufacturing businesses earlier this year with the purchase of nine plants from Dutch consumer electronics maker Royal Philips Electronics NV for $231 million in cash. The company also entered the automotive manufacturing business, which Lewis assesses to be a $50 billion-a-year opportunity, with the acquisition of some assets from automotive chips maker Valeo SA of France for an undisclosed sum.
In addition, Jabil increased its market position in storage hardware, buying assets from Seagate Technology Holdings of Scotts Valley, Calif., for $26 million in cash, and from Quantum Corp. of Milpitas, Calif., for an undisclosed sum.
The Philips and Valeo deals lessen Jabil's exposure to telecom, which accounted for 50% of its business at the end of 2001, said Brean Murray's Denney. Lewis adds that Philips will generate an extra $1 billion a year in revenue for Jabil.
But Chris Whitmore, an analyst with Deutsche Bank AG, is skeptical that Jabil can maintain its return on invested capital even though it's buying assets at a time when valuations have reached a trough. "In the past, Jabil has always been efficient in managing returns on capital," he acknowledged. "But I'm skeptical it can do the same this year."
Even so, Denney acknowledges that Jabil's approach to M&A is very disciplined. "Its acquisitions are accretive in a quarter or less." he says. "The company expects to generate returns in a year or less."
Jabil's selective M&A strategy over the past few years, however, is not the only reason the company is now outperforming its peers. J. Keith Dunne, a managing director for RBC Capital Markets, points out that Jabil's business model lends itself to greater success in hard times but less revenues in boom years, than competitors Sanmina, Solectron and Flextronics.
Sanmina and the like are known as "vertically integrated" contract manufacturers - that is, they manufacture parts like silicon and printed circuit boards - rather than merely assembling systems. This increases the services these companies offer but also their overhead.
"Vertically integrated companies are down 65% on average this year," says Dunne. "Their counterparts, the 'virtually' integrated EMS companies like Jabil, Celestica, and Benchmark, are down 20% on average."
Dunne is referring to Benchmark Electronics Inc., a small contract manufacturer based in Angelton, Texas, which boasts shares that are up 25% since December 2001. It is the best-performing contract electronics manufacturer, bar none.
But some analysts say Jabil has better staying power amid the tech spending downturn because it's larger than Benchmark. Smaller contract manufacturers are falling to the wayside, unable to compete with prices of the five largest providers.
"The shakeout of the second tier is creating an oligopoly, and Jabil is the best managed of the expected survivors," Denney says. |
