Just a reminder patroller.......................... After a cold spell, Wall Street is warming up again to Jabil
Circuit.
Just two months ago, the St. Petersburg-based company
warned analysts its earnings for the second half of the
fiscal year ending this August might not match the torrid
gains of last year. Jabil manufactures circuit-board
assemblies for computer makers and other such
customers, some of whom the company says are reducing
their orders due to the weakened Asian economy.
The news cast a pall over Jabil's stock as investors began
to question whether this softness would wreck the
company's next fiscal year, too, and if so, by how much.
Though Jabil's shares have gained 10% this year to
$43.813, that trails the 18.5% rise in the technology-laden
Nasdaq Composite Index. And the current price is a long
way from the 52-week high of $72 reached last October,
before profit-taking and a choppy market for tech issues
sent Jabil tumbling.
But things may be looking up for Jabil. Indeed, some
analysts expect that the current soft demand in Asia won't
hurt the company's earnings much beyond the current
fiscal year. Jabil has been among the fastest-growing and
most consistently profitable contract manufacturers of
circuit boards in the U.S., more than doubling per-share
earnings for the year ended Aug. 31, 1997. And now,
regardless of Asia's short-term impact, some analysts
project per-share earnings-growth rates of at least 30%
annually over the next three to five years.
Yet Jabil currently trades at only 19 times analysts'
consensus estimate for the year ending in August 1999,
according to First Call, making the stock among the least
expensive technology plays, analysts say. Typically, a wide
gap between a company's price/earnings ratio and its
growth rate signals upside potential.
As a result, some analysts have begun urging investors to
give Jabil a second chance.
"I feel increasingly bullish about fiscal 1999," says James
Savage, an analyst in the New York office of BT Alex.
Brown, who last week raised his rating on the stock to a
"strong buy" from a "buy" -- his second upgrade on
Jabil's shares in recent weeks. Mr. Savage says that while
shorter term, the company, along with others in the tech
sector, may be affected by Asia, Jabil nevertheless remains
one of the leading companies in its industry with sound
fundamentals.
Mr. Savage expects Jabil to salvage the first half of its
next fiscal year simply by going about its business, adding
new customers and gaining additional business from
existing ones. Analysts expect the company to add clients
across various industries but note that Jabil has told them
that it is targeting the fast-growing telecommunications
sector in particular.
Further, the company on Monday ended speculation
among analysts that it was going to make an acquisition --
a rare move for Jabil, which traditionally has generated
most of its growth internally. Jabil announced that it
plans to acquire the manufacturing assets of
Hewlett-Packard's LaserJet Solutions Group Formatter
Manufacturing Organization. Terms of the deal, which
includes assets in Boise, Idaho, weren't disclosed. The
transaction is expected to close by Aug. 31.
Scott Butler, an analyst at Pacific Crest Securities, an
investment firm in Portland, Ore., says he is confident
about Jabil's ability to recover its earnings momentum by
the end of 1998. Some of his clients, he says, are interested
in the stock and "are saying 'Hey, it's trading at a huge
discount.'"
The stock's modest price/earnings ratio and Jabil's strong
position in its industry are key reasons why John Dean, an
analyst in the San Francisco office of Salomon Smith
Barney, initiated coverage of Jabil last week with a "buy"
rating. Mr. Dean says that while near-term earnings might
not sizzle, in the longer term the sector is poised for
above-average growth, giving Jabil's stock "excellent
long-term appreciation potential." Mr. Dean and other
analysts say that investors are getting too hung up on the
short term, and that long-term prospects for the
electronics contract-manufacturing industry have never
been stronger.
Indeed, increasing numbers of electronics makers are
doing what once was unthinkable -- they're paying the
likes of Jabil to make the brains of their products rather
than doing it in-house. For personal-computer makers, for
example, it's often less expensive to turn over portions of
their manufacturing to a Jabil than to continue
performing those functions in-house. Furthermore,
contractors can adjust their production volumes faster
than large manufacturers when consumer demand is rising
or falling. Jabil's revenue growth reflects this outsourcing
trend. In the fiscal years 1993 to 1997, the company's sales
tripled to $978.1 million.
Of course, such flexibility can also work against Jabil
when its customers cut orders. In January 1996, for
instance, Jabil announced that a major customer was
reducing its business, causing the company's shares to
plunge 44% over the next few days in intraday trading.
Though the stock later recovered, that incident, and the
slump in Asia, underscore the risks inherent in technology
investing, and Jabil's exposure to the health of its
customers.
Still, analysts reason that based on Jabil's financial
strength and increasing visibility throughout the industry
-- the company has established a reputation as a very cost
efficient and reliable manufacturer -- it can achieve 30%
earnings growth regardless of Asia's short-term impact.
Jabil's move last week to the New York Stock Exchange
from Nasdaq may lead to fewer wild swings in its share
price. The Big Board's more orderly trading "limits the
volatility to some extent," says Mr. Savage of BT Alex.
Brown. Jabil also hopes to raise its profile among
international investors who might otherwise dismiss
Nasdaq stocks as too young and risky.
Company executives are providing more detailed earnings
guidance to analysts as well, reducing the likelihood of the
massive upside surprises that in recent years have
attracted short-term traders and contributed to the stock's
volatility.
In the days following the company's mid-March
announcement that it had caught the Asian bug, some
analysts rushed to downgrade Jabil, reasoning that there
wasn't much of a catalyst to bolster the stock. The news
was a double whammy of sorts because it came on the
heels of sluggish demand by some computer-networking
clients that are in the midst of product transitions.
But some Jabil investors took a longer view. And now, the
company's pending purchase of certain printer-related
manufacturing assets from Hewlett-Packard is causing
some analysts to come around, too. Yesterday, Robert
Stone, an analyst at Cowen & Co. in Boston, raised his
rating on Jabil's shares to "buy" from "neutral," citing
the acquisition's potential to improve the company's
earnings. In a May 12 research report, Mr. Stone
increased his per-share earnings estimate for fiscal 1999 by
14 cents to $2.38 and established a new 12-month price
target of $60 to $63 a share.
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