Jabil Completes Telmar Acquisition

Jabil Circuit Inc. (JBL - Analyst Report) recently announced that it has completed the acquisition of Texas-based Telmar Network Technology, Inc., a global provider of after market services to communication network service providers, enterprise and original equipment manufacturers (OEM).

The acquisition will enable Jabil to develop a multi-vendor after-market services platform, which will provide end-to-end network maintenance services, thereby enhancing the operating efficiency of its customers.

The company intends to integrate Telmar’s business within its Diversified Manufacturing Services (DMS) segment. The DMS segment caters to the fast growing emerging sectors of healthcare & instrumentation, industrial and clean tech. These sectors contributed significantly to top-line growth, which increased 43.0% year over year to $1.7 billion in fiscal 2011.

Jabil has been focusing on expanding its high-margin DMS business over the last couple of years, and this has resulted in a higher contribution to the total revenue (up to 36.0% from 29.0%). This has also boosted its core operating margin, which expanded 100 basis points over the same period.

Jabil forecasts DMS revenue to increase 3.0% sequentially for the first quarterof 2012. We believe the improvement in the after market services business based on this acquisition will expand Jabil’s customer base, thereby driving top-line growth over the long term. The acquisition is also expected to boost Jabil’s competitive edge over its peers such as Flextronics Inc. (FLEX - Snapshot Report) and Sanmina-SCI Corp. (SANM - Snapshot Report).

Our Take

Jabil reported strong results in the fourth quarter, beating the Zacks Consensus Estimate by a nickel. Revenue increased 11.0% year over year to $4.28 billion in the fourth quarter of 2011 and was well above the Zacks Consensus Estimate of $4.18 billion. For further details please see Jabil Beats on Lower Costs.

Jabil is expected to benefit from strong growth in the Mobility, Aerospace and Defense, Healthcare, Instrumentation and Industrial, Clean Tech, Networking and Storage segments over the long term. Moreover, a lean cost structure, strong cash flow generation capabilities, an expanding global business and an improving balance sheet are positives for the stock.

However, we believe that the volatile macro environment in Europe will remain an overhang on the stock in the near term. We maintain a Neutral rating on Jabil over the long term (6–12 months).

Currently, Jabil has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.