What's Wrong At Jabil Circuit?

Several firms commenting Jabil Circuit (NYSE:JBL) after quarterly results (see conference call transcript):

- Citigroup notes that at first look Jabil's sales outlook appeared only a bit soft but additional analysis reveals that the outlook includes the company's recently acquired Taiwan Green Point which consensus did not include resulting in an organic outlook that indeed was lower than expected. While the company cites a host of issues (product, customer transitions, and exiting lower profitable business) investors will still interpret this as subdued demand and not the typical Jabil upside.

The biggest disappointment to investors is the company's head fake of a lack of operating profit turnaround. The company has been very vocal of operating margins to return to the 4-5% range in the next few quarters and this clearly is no longer in the case with an OPM outlook of 2.5-3.0% in May and 3.25-3.75% in August.

Firm sees no reason to buy Jabil as catalysts for operating turnaround are at least 3-6 months away, in their view, and with 50% of the Street with Buy ratings on the stock and EPS estimates significantly higher than ours, firm expects sentiment and estimates to shift lower.

As derivative Implications firm see additional risk to Solectron, Sanmina, and Celestica, which will implement the Cisco lean inventory management process during the next few quarters which has taken Jabil more effort to streamline.

- Jefferies says that although Jabil was unable to provide fiscal 2Q07 profit and margin data due to the ongoing option investigation, they believe profitability was well below their projections.

Just as Jabil resolves two (of the three) execution issues during the February quarter and the final issue is on the mend, Jabil's consumer business is now undergoing a reconfiguration due largely to pricing pressure, in their view. As such, Jabil expects a sequential decline in its consumer business in the May quarter (despite incremental revenue from a recent acquisition) and another decline in the August quarter.

- Cowen says they remain cautious on Jabil's shares near-term as the co is now transitioning two significant consumer customers (possibly Nokia & Philips) to different business models. This will hurt rev/margins for 3Q/4Q. Plus, Jabil said end market demand has been weak since December, but has now stabilized. With margins, May Q should be the trough, with improvement q/q for rest of CY07.

What's Wrong at Jabil? Good question, tough to answer specifically. There has been options backdating, May 06 qrt with three operational issues (repair, ramping biz & component design), mostly now resolved. Nov 06 saw poor mix, an internally developed product write-off, and weak demand. Now Feb 07 qrt has big challenges hitting the consumer space. The Nokia cell phone biz will ramp down and new programs which incorporate vertical components (plastic/metal casings) will ramp up. Normal 'EMS' businesses with Philips will ramp down, as Jabil works to jointly develop and then build products (LCD TVs). All this hurting revs/margins near term.

Firm's thoughts; 1. Jabil grew too fast in FY06, revs up 37% to $10.3B, and tried to do too many things with product design. 2. the consumer biz is very different than other areas of EMS. Very low margins, high turn inventory, all require a streamlined supply chain, with more vertical components in house, similar to the Hon Hai, Flex model. Jabil is working to adjust to this type of operation. Firm would look for visibility to emerge in August or Nov qrts.

- Bear Stearns taking their rating down to Peer Perform from Outperform as they no longer see compelling risk/reward. Firm says JBL is experiencing too many moving parts in its consumer business model which is driving near-term revenue deterioration as well as increased risk. Specifically, JBL is moving to a more product development-based relationship with PHG they believe, allowing it to perform more value-added R&D work and less commodity assembly. In addition, firm thinks JBL is moving the majority of its NOK business to a vertically integrated model which can also introduce new near-term risks. Firm believes JBL has the management team to execute on these challenges, however, they don't expect results for ~2 qtrs.

Notablecalls: Jabil has at least two more tough quarters ahead with both revenue and margins suffering. $23.5 level seems to act as a support for the shares N-T but I do not expect that level to hold given all the operational issues. Probably we are going to see lower share price no later than just after the opening bell rings today.