Jabil Circuit: Unloved And Undervalued

| About: Jabil Circuit (JBL)

Summary

Shares have gone nowhere over the last 10 years - but the company continues to grow revenues and report strong profits.

A lot of controversy about supplying Apple amid increasing capital expenditures to build out their capabilities.

Fiscal 2016 will be three strong quarters with Q3 2016 as the weaker one, as per CEO. earnings per share are still expected to be over $2 for the year.

Jabil Circuit Inc. (NYSE:JBL) is the fourth largest electronics manufacturing services (EMS) provider in the world, trailing Hon Hai (Foxconn) and Pegatron and Flextronics. As per their 2015 Annual Report, Jabil is a leading provider of worldwide electronic manufacturing services and solutions and has 180,000 employees spread across 27 countries. In all their reports Jabil stresses "teamwork" and "sharing best practices" and they have a lot of photos of smiling employees.

It has been two months since Jabil reported its second fiscal quarter (Q2) on March 16th, 2016. It was the conclusion to a decent first half of fiscal 2016 (ends on August 31st), although revenues were $150 million less in Q2 2016 than had been forecast by management. Expectations for Q3 2016 and the full year were reduced substantially.

Jabil is still at the mercy of its customers. During fiscal 2014 Jabil made a painful decision to exit the BlackBerry business and revenues and profits were down. That is a fact of life in the EMS industry. Flextronics wound-down the Lenovo Motorola business in China and as a result (at least partially) saw revenues down $2 billion for the year earlier period. But both companies will be stronger going forward having separated themselves from a less promising line of business.

For fiscal 2016, management now expects revenues of $18.5 million and core diluted earnings of about $2.12 per share versus earlier estimates of $20 billion of revenue and EPS of $2.60. Revenues are still projected be up for the year with $18.5 billion expected versus $17.9 billion recorded in fiscal 2015. Core earnings per diluted share of $2.12 are close to the $2.07 recorded for fiscal 2015. free cCash flow is expected to be $250 million to $300 million which is comparable to what FCF was in 2015.

Revenue growth in fiscal 2015 was bolstered by supplying Apple (NASDAQ:AAPL) with components for the iPhone product line. The iPhone from Apple had been very popular up until recently when iPhone sales for Apple showed a surprise drop from the year ago period. Jabil is still firmly committed to the mobile space but also stressed the strengths of the company's diversification into areas like healthcare.

CEO Mark Mondello in the Q2 2016 earnings report stated:

"The performance of our EMS segment was outstanding and above expectations, while our DMS segment grew modestly as we faced a slight downturn in product demand late in our fiscal quarter specific to our mobility business," he added.

In the related conference call, CEO Mondello stated:

"As I step back and look at the full fiscal year, we're now positioned to deliver $700 million in terms of core operating income..."

"For the year I see our EBITDA remaining well north of $1 billion and free cash flow landing in the range of $250 million to $300 million. This outlook is driven by three solid quarters, Q1, Q2 and Q4, combined with our current quarter Q3, a quarter that exhibits deep investment and under-absorbed capacity.

So how are we able to grow EBITDA and core operating income year-on-year when faced with such dramatic unit volume reductions? There's three main drivers. One, our aggressive play towards truly diversifying our income streams, two advancing our solution selling and value proposition; and three our unique structure and our innovative people.

Our EMS team believes they will grow core operating income 15% to 20% year-on-year while expanding full-year core operating margins beyond 3%. The current marketplace offers technology and business model transitions as well as secular trends that favor Jabil."

"…As our Nypro healthcare business enters fiscal year 2017, we're looking at a very healthy cash generator for the company, cash generated from well-diversified multi-year product platforms which cut across healthcare, wellness and big pharma."

Drastically Different than fiscal 2014 - CEO Mark Mondello:

"If you take a look at fiscal year 2014, we had a dramatic downturn as everybody knows on a program and for that year the company - I think we made about $340 million in operating income. Today, we have got some abrupt downturns and the company is going to do $700 million. So I think it's drastically different and I think what's different about it is we started three, three-and-half years ago to really drive in diversification throughout the company, and that has taken hold."

"And I also said that I am bullish in supporting the mobility space at the moment, we have made some investments. I don't want people to be confused about the fact that the investments we have made in the last two years in regards to invested capital and buildings are going to be there for us to leverage over the next two to three years."

EMS Business is Growing - CEO Modello again:

"Our EMS business is a $11 billion business going to $12 billion or $13 billion business and core income dollars in that business year-on-year are going to grow north of 15%. In this market, that's pretty good. And I think not that long ago, three, four, five years ago, people were looking at kind of legacy EMS business going, you know what, it's going to kind of have GDP type growth to it and legacy EMS margins to it. And our folks have kind of transformed that and we've got amazing customer relationships and we're quite bullish."

He also mentioned that Jabil is celebrating their 50th year of operations in 2016. I continue to think it is a good long-term holding that's currently in the midst of uncertainty about its longer-term outlook, especially regarding Apple and the upcoming iPhone 7.

Stock Price Performance

Jabil's stock price has been on a roller coaster ride for the last year, dropping below $17 in August 2015 but then rising after the bullish guidance given in the Q4 2015 earnings report in September. By December 2015 Jabil shares were over $25, but then started to drop as 2016 began. They hit $18 in the January 2016 sell-off and then rose to $22 before the March 2016 earnings report.

There was another sharp break to the downside after the Q2 2016 report as the weaker expected outlook was priced into the shares. I think that the shares have been oversold and see Jabil shares as "washed out" from all the selling. Even as the overall market advanced from the January 2016 lows Jabil is still stuck near the lows from August 2015 and January 2016. There's still negative sentiment about being a supplier to Apple for the iPhone. My hope is that after Q3 2016 earnings the shares will begin to discount better news to come from fiscal 2017 and beyond.

The current stock price of $17.50 translates into a equity market capitalization of only $3.4 billion for a company that does $18 billion a year in revenue. Over the last 10 years $26 has been the upper limit of the stock price. In late 2006 and in early 2012 and again in late 2015 the shares reached $26 but then traded lower. Since 2012 the low point for the shares has been around $16 and the shares have been in a channel trading sideways between $16 and an upper limit of $26.

Conclusion

The fact that Jabil continues to focus on growth by spending $963 million on additions to property plant and equipment in 2015 when depreciation was only $528 million shows they are serious about investing to enhance their capabilities and to generate growth. I believe that Jabil shares under $18 offer good value to a patient investor at under 9 times projected earnings for 2016. They also pay a small cash dividend and have been buying back shares over the years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.