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Bull of the Day: Jabil Circuit (JBL)

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Jabil Circuit (JBL - Free Report) is a $4 billion global provider of electronic and semiconductor manufacturing services. The company designs and manufactures electronic circuit board assemblies and systems for a variety of end markets including communications, PC, mobile, automotive, aerospace, defense and consumer products industries.

Jabil has sustained trailing 12-month sales of over $18 billion since breaking above that milestone late last year. Major customers include Apple (AAPL - Free Report) , Cisco (CSCO - Free Report) , Hewlett-Packard, IBM, NetApp, and Zebra Technologies.

And on September 27, at their headquarters in St. Petersburg, Florida, management gave an Analyst & Investor Day presentation that bolstered confidence about its business on Wall Street. Jabil highlighted its evolution in the last several years from contract manufacturer into an total solution provider involved in various aspects of the design, procurement, and manufacturing of semiconductor components for customers across their spectrum of end-markets.

The outlook offered revenue and EPS growth projections for the next three years, with the top line expected to see CAGR of 4.5% to $20.5 billion, operating profit to grow 8-10%, and adjusted-EPS growth of 16-20%, aided by interest expense reduction and buybacks as well as a lower tax rate. The figures implied annual EPS of $3 in fiscal year 2019.

Estimates Already Headed Up After Strong Q4

Jabil reported stronger-than-expected Q4 fiscal 2016 results with adjusted earnings (including share-based compensation but excluding all one-items) of 28 cents per share that surpassed the Zacks Consensus Estimate of 16 cents. That's a whopping 75% EPS beat.

Revenues of $4.43 billion also beat the Zacks Consensus Estimate of $4.38 billion but were lower than the prior-year quarter’s figure of $4.68 billion.

In response to this performance, analysts were busy raising EPS estimates for this year and next.

The current fiscal year, ending August of 2017, saw profit projections move up from $1.62 to $1.70, representing 8.65% growth.

And next fiscal year saw EPS estimates rise from $1.71 to $1.77, with only one analyst providing an update. More upward revisions from other analysts could be expected as the Analyst & Investor Day projections and restructuring are processed.

Restructuring Program

Apart from the quarterly results, the company declared its plans to realign its global capacity and administrative support infrastructure so as to optimize organizational effectiveness amid a sluggish macroeconomic scenario.

Jabil projects the cost of restructuring to be approximately $195 million spread over a period of two years. Of the total expenses, about $120 million to $150 million will be incurred in fiscal 2017 and the rest in fiscal 2018.

The company projects an impact of approximately $50 million on its cash and cash equivalents for two years. In fiscal 2017, its cash and cash equivalents will witness a negative impact of $25 million.

Near-Term Guidance

Beyond the grand plans revealed at the Analyst & Investor Day last week, the company also initiated guidance for the first quarter of fiscal 2017 in it last earnings report.

For the first quarter, Jabil expects total company net revenue to decrease 6% year over year to the range $4.8 billion to $5 billion while core operating income is estimated in the range of $175 million to $225 million.

On a year-over-year basis, revenues from Diversified Manufacturing are expected to decrease 12% given softness in the mobility business. Electronics Manufacturing Services revenues are expected to be flat on a year-over-year basis.

The company expects GAAP earnings in a range of 5 cents to 36 cents per share, including 4 cents for amortization of intangibles, 13 cents of stock-based compensation expense and 21 cents – 32 cents as restructuring charges.

The Semiconductor M&A Frenzy

One final element to keep in mind when evaluating a company like Jabil Circuit is the current buyout trend among chip companies. Last week, rumors were afloat that Qualcomm (QCOM - Free Report) could be looking at Dutch NXP Semiconductors (NXPI - Free Report) in a potential $40 to $50 billion takeout.

Several analysts put out research reports acknowledging the realistic nature of such a combination and what price NXPI should actually fetch. Investment bank Jefferies calculated that NXP could see bids in a range of $136 to $172 per share.

It is against this backdrop of feverish consolidation, where smaller specialized semiconductor companies get swallowed up by bigger platforms to move the growth needle, that Jabil should be seen as it reinvents itself for new markets.

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