Did I miss something-- did the stock go down today?
My read on the earnings report:
1. Earnings hit reduced forecast, but revenues come in light.
In the last earnings release, the company said "...the company anticipates that revenue will slow to near the level of the first fiscal quarter of the year, with a resumption of growth in the fall quarter." In the 1Q of FY98 they did about $320M, and today they reported $310M, so they came in about $10M light of expectations. Also they have reduced their forecast for the 4Q of FY89 ending at the end of August, to flat revenues and lower operating income. Seems to me that they are coming in about $20M lower in revenues next Q than they had hoped, out of $310M.
2. They confirmed the existence of two new customers. One product is making notebook computers (rumored to be Dell, and could add $500M in new annual revenues). The other is a data communications customer (rumored to be Lucent, and should add several hundred million or more in annual revenues after they ramp the business over the next 12-18 months). Add in the $600-900M in annual revenues the HP deal will kick in after it closes and builds, and this company is now seeing visible new revenue growth of $1500M to $2000M over the next 18 months. Since FY98 is likely to come in around 320+330+310+310 = $1270M, this means the company should easily double revenues in the next 12-18 months. I expect they should easily see an average revenue growth rate of 55-60% for the next two years, even without any major new customers or contracts!!! So what if they fall short by $20M in the next three months, when they will add 100 times that amount in the next two years.
In my eyes, the current shortfall is almost unimportant compared to the longer term growth, that will be generated as these new customers ramp. Of course though, earnings will not grow as fast as revenues. We don't know the cost of the HP deal yet, but my guess is in the $250-300M range, and the cost of build a new greenfield plant in San Jose is significant, as well as the costs of expanding any other plants. They will need to raise some money, and given the strength of their balance sheet, and the comments in the release, I expect they will borrow money, or issue LT debt to take advantage of low interest rates. Thus their interest costs will climb. Finally the startup costs of the new plants will cut their margin a bit, and so earnings growth will not keep pace with revenue growth. Still the top line growth is so robust, they shouldn't have any trouble increasing bottom line by an average 30+% over the next two years. Anyway the startup costs may explain some of the mystery of why analyst earnings forecost for next year shows only about 23% growth rate. The first quarter (or two?) will be hit with startup costs.
It will be interesting to see how the market values the brighter long and intermediate term picture versus the slower near term picture. For comparative purposes, Jabil outearned SLR this quarter, 45 cents to 41 cents and JBL stock sells at a significant discount to SLR (34-35 to 41). Yet Jabil's revenue growth of 60-100% over the next year, will top Solectron's expected 40% growth rate over the next year (directly implied in SLR's conference call last night). Why shouldn't this stock sell at a price higher than SLR's? BTW, Solectron also said margins will decline somewhat as expansion costs and new box-build programs ramp at their company.
This stock is still trading less than 15 times forward earnings, and more than ever, should be able to grow earnings an average of 30+% a year for the next several years. I'll hold mine, and wait for the growth to kick in. This stock reminds me of Flextronics (FLEXF) at 17-20 in May last year. Down 50-60% off the high, flat near term earnings, undisclosed acquisition costs, higher interest and startup costs, and huge new contracts that would drive revenue substantially higher over the next year, followed by significant earnings growth. The stock has doubled off that low (and is still a good value). This could easily be the fate for Jabil over the next year.
Paul |
