Restructuring Costly For Jabil
Andrew Farrell, 03.23.07, 12:32 PM ET
Jabil shares traded sharply lower Friday after weak guidance worried investors that the company's restructuring will drag on revenues.
Shares of Jabil Circuit were down $2.68, or 10.8%, to $22.25 in Friday morning trading after the company announced third-quarter earnings guidance of 17 cents to 23 cents per share, well below Wall Street expectations. Analysts polled by Revere Research anticipate earnings per share of 41 cents.
Under GAAP standards, the company said it expects an even lower earnings per share--a loss of 8 cents to a gain of 4 cents--largely because of restructuring costs. Jabil said it expects restructuring and impairment charges of 13 cents to 19 cents per share in the third quarter.
Jabil surprised investors last year with restructuring plans, which some suspected were an attempt to transition the company from its virtual business model to more vertical offerings. (See: "Jabil Restructuring Tempers Investor Interest.")
But the company's restructuring isn't just raising costs. Jabil's guidance also raised concerns that the strategy could hurt sales. Kevin Kessel, an analyst at Bear Stearns, explained that Jabil is tinkering with many parts at once.
"Jabil is experiencing too many moving parts in its consumer business model which is driving near-term revenue deterioration as well as increased risk," wrote Kessel in a client note.
According to Kessel, the company is adjusting its relationships with major customers like Koninklijke Philips Electronics and Nokia. According to data compiled by Revere Research, Koninklijke's business accounts for about 14% of Jabil's revenues and Nokia accounts for about 13%.
Kessel said even though the Jabil management team is up to this challenge, for the next two quarters the changes will pressure revenues and increase risks. Kessel downgraded the stock from "outperform" to "peer perform."
Jabil's guidance obscured a second-quarter performance that seemed strong. Jabil provided preliminary revenue for the second quarter of $2.9 billion, up from $2.3 billion the same period a year ago. Jabil did not provide complete results for the quarter because of an ongoing internal audit.
Those second-quarter figures slightly beat expectations. Analysts polled by Revere Research estimated revenue of $2.8 billion for the period ending Feb. 28.
[Harry: Jabil is usually an early canary of weakening demand. If we can get similar data points from other ECM's then demand is under pressure for their customers and they are passing on the pain to their suppliers in order to maintain margin. It would make sense in light of the current tightening cycle the US has gone through.] |
