Exactly Right. Limited downside with nice upside potential.
You wrote: Now that we know the worst is over, what's to lose?
4 points on the most? We've seen 30 as a strong bottom. I wish I could tell the future, and the past so much as I can with this company as with others. We've experienced the bottom, now its time to test the top.
I see the downside as 30 (less than 10% probability) and the upside as 60 (more than 50% probability) in one year. I like that kind of risk/reward ratio.
I base my upside on a 30% rise in earnings year over year, and based on a $1.93 or so earnings for the year ending in August. Then 99FY should come in at $2.51 so thats the trailing earnings the market will be seeing in 15 months (the consensus earnings of 2.33 is only a 20% gain; I think this is low and we will see upgraded earnings estimates later this year). Using a trailing multiple at that time of 25 ( near the high end of the trading range we saw in late February), I think we could see 60 easily. If the mo guys pile back in, who knows where we'll go?
For the downside, the worst I see is flat earnings over the next year, and I think this is a very low probability case. Using a low PE multiple of 15 times the recent $2.00 a share run rate, I get 30 as the downside. But I think this is almost a disaster case.
Finally, there are a lot of indications that the company could see better than 30% top line growth, say 40-50%. At first, this top line growth may not show up as bottom line growth, but eventually the bottom line will catch up as upfront costs are left behind. I understand there are a quite a number of huge outsourcing deals floating around right now, and it would surprise me if a well managed large ECM operator like Jabil won't pick up one or two of them. Other large operators in the sector have all recently picked up big deals (for example; SLR- picked up NCR and Ericsson deals, SCI- picked up HP inkjet printers and Ericsson deals). I understand that HP is nearing the end of their oursourcing moves (they were the leaders among domestic companies) but the deals they have left represent some of their largest plants. The recent SCI deal should be huge, and the next deals announced could be as large. I also understand that Lucent is looking at outsourcing now, and up to now has manufactured almost all their stuff inhouse. This is important, because if Lucent begins to outsource, their growth rate is expected to be huge. Yesterday a money manager on CNBC commented on how Lucent seems to be getting a $500M telecom equipment order every other week. Lucent may be planning to outsource a lot of the new growth in their business. Finally, don't underestimate the new business Jabil has been getting from Gateway (and other PC makers?). If the unit volumes of this business grows as the ASP's drop, the amount outsourced capacity these makers will need to keep up with demand is quite large.
In summary, I think there is a reasonable chance that we will see 40-50% top line growth over the next year, and almost certain to hit 30%. If we get the larger growth rate, then my upside estimate for the stock will be low.
Paul |
