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Shares of Jabil Circuit (JBL) have traded in a tight trading range between $19-$20 since the start of 2013. In the first week of February, the provider of worldwide electronic manufacturing services and solutions announced the acquisition of Nypro.

The Deal

Jabil Circuit announced that it has agreed to acquire Nypro, a provider of manufactured precision plastic products in the Healthcare, Packaging and Consumer Electronics industries. The deal values Nypro at approximately $665 million. Nypro currently employs some 12,000 workers in over 10 countries.

Nypro is a leader in precision plastic consumables and disposables for the healthcare industry. The deal complements Jabil engineering and supply chain solutions and Jabil's ambitions to become a leading provider in the global healthcare market. Nypro also offers opportunities in the food, beverage, household and personal care industry in order to address the $140 billion rigid plastic packaging market.

CEO and Chairman Timothy L. Main commented on the deal:

The combination with Nypro will extend Jabil's materials manufacturing capabilities into the healthcare and consumer packaging markets as well as add depth to our consumer electronics business. We think this is an important strategic step in Jabil's development of engineering and capability intensive businesses.

Nypro generated roughly $1 billion in annual sales over the past year, valuing the firm at approximately 0.65 times revenues. The deal is expected to be neutral to slightly accretive to the core earnings of Jabil for the remainder of the fiscal year of 2013. The deal will be accretive to GAAP and core earnings for the fiscal year of 2014.

The deal is subject to shareholder approval by participants in Nypro's ESOP, its common shareholders and regulatory approval. Jabil expects to close the deal in the fiscal third quarter of 2013.

Valuation

Jabil Circuit ended its first quarter of its fiscal 2013 with $1.03 billion in cash and equivalents and $1.67 billion in short and long term debt, for a net debt position of approximately $640 million. Jabil will finance the deal with cash at hand and credit facilities.

The company generated $4.6 billion in revenues for the first quarter of its fiscal 2013. Jabil net earned $105.8 million for the quarter, or $0.51 per share. At this rate the company is on track to report annual revenues of approximately $17 billion on which the firm could earn $400 million. The market currently values Jabil at $4.0 billion. This values the firm at roughly 0.23 times annual revenues and 10 times annual earnings. Jabil pays a quarterly dividend of $0.08 per share for an annual dividend yield 1.6%.

Some Historical Perspective

Shares of Jabil have given up quite some ground over the past year. From levels around $25 at the start of 2012, shares have fallen to lows of $17 in October, before inching up to $20 at the moment. Despite the modest uptick, shares remain far from their highs around $65 in 2000.

Between the fiscal year of 2009 and 2012, Jabil has grown its annual revenues from $11.7 billion to $17.1 billion. After reporting a $1.2 billion loss for 2009, Jabil has returned to profitability, earning $395 million over the past fiscal year.

Investment Thesis

Shareholders of Jabil hardly reacted to the rather sizable deal which Jabil made. The deal value is roughly a sixth of the firm's own market valuation. Jabil pays 0.65 times annual revenues for the firm compared to a revenue multiple of 0.23 times for the own firm, thereby adding roughly 6% in annual revenues.

As Jabil guides for modest earnings per share accretion, it seems that the value of expected synergies is mostly distributed to shareholders of Nypro, given the higher valuation multiples. It is not surprising that shareholders in Jabil hardly react to the deal, given these arguments.

Despite the deal, the financial position of Jabil remains solid and the valuation multiples are reasonable. Yet investors seem scared to attach higher valuation multiples to Jabil's business with the massive 2009 loss in their mind.

I would be one of those investors and I remain on the sidelines based on the prospects of sizable losses, which in 2009 easily surpassed normal annual profits. Fact is that Jabil remains an incredible low-margin business which is really vulnerable for an economic setback. I remain on the sidelines.

Source: Jabil Circuit Is Still Vulnerable To Setbacks