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. |
