The Wall Street Journal Interactive Edition -- May 13,
1998For Jabil Circuit, Asia Fallout
May Be Just Blip, Analysts Say
By KAREN L. TIPPETT
Staff Reporter of THE WALL STREET JOURNAL
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.
Assets Acquired
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.
Flexibility Factor
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
both 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.
The Asian Bug
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. Tuesday, 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. |
