Don't Judge Jabil By First Impression

11/16/2015


  Recent Price
$24
  Dividend
$0.32
  Yield
1.3%
  P/E Ratio
12
  Shares (millions)
196
  Long-Term Debt As % Of Capital
37%
  52-Week Price Range
$24.95 - $16.90

At first glance, Jabil Circuit ($24; JBL) doesn't look like the type of stock Dow Theory Forecasts usually recommends.

• At $4.8 billion in market capitalization, it's the second-smallest stock on the Buy List.

• The world of contract circuit-board manufacturing is known for low profit margins, pricing pressure, shifting demand trends, and powerful cyclicality.

• One customer, Apple ($116; AAPL), accounts for nearly 24% of Jabil's sales, and our Buy List already has a big stake in Apple's success.

However, successful investing requires deeper thinking, and Jabil has a lot to offer. A delve beneath the surface reveals an attractive valuation, improving profitability, genuine growth potential, and access to a variety of high-growth markets. We initiated coverage of Jabil as a Buy and a Long-Term Buy in the Nov. 2 issue.

Business breakdown

While Jabil isn't large relative to most of our covered stocks, it's a major mover in the electronics-manufacturing group, with a market value nearly four times the industry median. 

The electronics-manufacturing business (60% of fiscal 2015 revenue, 44% of segment profits) assembles products for customers in various tech and telecom industries, as well as automotive, home automation, industrial, energy, and retail end markets. Diversified manufacturing (40%, 56%) designs products for consumer, defense, health-care, and packaging clients, as well as tech companies.

In September, the company projected 33% revenue growth for the diversified unit and flat sales for electronics manufacturing. Those growth numbers would vault diversified manufacturing to nearly 50% of company revenue in the coming year, up from 30% of revenue in fiscal 2013.

Growth and value

In the year ended August, Jabil grew sales 14% while operating cash flow more than doubled and per-share profits more than quadrupled. Such torrid growth is unsustainable, but Jabil's broad business mix and expansion into new markets should keep profits rising.

The consensus projects per-share-profit growth of 26% over the next 12 months, tops among electronics manufacturers and more than three times the industry average. Since Jabil exceeded the August-quarter per-share-profit estimate by 18%, analysts' targets for both fiscal 2016 ending August and fiscal 2017 have increased roughly 8%.

Even better, we can buy that growth at a deep discount. At 12 times trailing earnings, Jabil trades 30% below the average contract electronics manufacturer in the S&P 1500 Index.

Another driver of profit growth is rising margins. Operating profit margins reached 6.2% in the 12 months ended August, up from 5.1% a year ago and 3.9% six years ago. Credit fast growth by the higher-margin diversified unit as well as aggressive cost controls. Jabil has run profit margins above 11% at times in the past, suggesting the company can keep improving.

Obtain an annual report for Jabil Circuit Inc. at 10560 Dr. Martin Luther King Jr. St. North, St. Petersburg, FL, 33716, (727) 577-9749, www.jabil.com.

JABIL CIRCUIT
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Aug '15
0.53
vs.
0.05
15%
24.76
-
16.90
16 - 11
May '15
0.49
vs.
(0.06)
15%
24.95
-
21.12
24 - 20
Feb '15
0.50
vs.
0.10
20%
22.62
-
19.45
35 - 30
Nov '14
0.55
vs.
0.43
5%
21.87
-
18.03
42 - 35
           
Year
(Aug.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
17.90
2.07
0.32
24.95
-
16.90
12 - 8
2014
15.76
0.53
0.32
24.32
-
15.30
46 - 29
2013
18.34
2.26
0.32
24.09
-
16.39
11 - 7
2012
17.15
2.40
0.32
27.40
-
14.93
11 - 6
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
99
93
66
47
75
86

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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