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Taking A Position In Jabil

|Includes: Jabil Inc. (JBL)

Jabil (NYSE:JBL) tanked on guidance for the next quarter, revenue to be down 25%. Part of that is the already known loss of the Blackberry account, the rest is due to their intention to divest part of their operations. They already have a buyer, and will be reporting results in discontinued operations pending the sale. That, and an unspecified customer is moving around a bit. They maintain the relationship is solid.

GAAP earnings are 57 cents for the most recent quarter. Annualizing that to $2.28, I reduce it by 25% due conform to guidance, and arrive at normalized earnings when the smoke clears of $1.71. Applying a multiple of 12.5, I arrive at a target price of $21.

Jabil has somewhat more debt than I prefer, but cash flow is substantially greater than earnings, a sign of strength as far as I'm concerned.

With shares trading at $15.75, I bought a vertical call spread, the JBL Jun 2014 13/15, for a net debt of $1.39. The trade breaks even at $14.39, and can be adjusted depending on how the situation develops.

This was done in the speculative portfolio, which consists primarily of vertical calls spreads, in the money, on tech situations. Most of them are relatively high beta and have excess current assets as a support to share prices. Jabil has the strong cash flow, as well as good growth expectations for the remaining businesses.

Disclosure: I am long JBL.