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Jabil Circuit's Strong Margins Make It a Buy Ahead of Earnings

Stocks in this article: JBL AAPL CSCO BBRY

NEW YORK (TheStreet) -- Contract-electronics manufacturer Jabil Circuit (JBL - Get Report) will report fiscal third-quarter earnings on after the market close on Wednesday.

The stock is trading around $20, up 14.5% for the year to date. With a price-to-earnings ratio of 16, which is 1.5 points below the industry average, there is very little downside risk to owning these shares.

Jabil, which is known for supplying electronics components to (among others) Apple (AAPL) and Cisco (CSCO), has all of the makings of an impressive turnaround story. Industry experts are projecting improved IT spending in the next several quarters, which means Jabil can reach $22 in the next six to 12 months. This is not just a one-year story, however.

There are also signs Jabil's earnings will grow impressively starting in 2015. Analysts have begun to take notice. On Wednesday, I expect the company to deliver sequential improvements on earnings-per-share, revenue and margins.

Wall Street will be looking for a loss of 9 cents per share on revenue of $3.60 billion. After several quarters of weak revenue, I'm expecting Jabil to return to growth across its entire business line. With Apple accounting for 20% of Jabil's revenue, I also expect the company's operating margin to improve.

Since the start of 2014, the company's shares of have had little direction, moving in a very tight range between $17 and $18. The stock has now begun to break out but for now are still cheap.

During the conference call investors will need to pay special attention to what management says about Jabil's diversified manufacturing services (DMS) business. This is the company's strongest segment and accounts for roughly 40% of its business.

Over the past couple of years, as Apple has grown its iPhone relationship with Jabil for things like iPhone 5 casings, the DMS segment has grown more prominently. With the strong demand now projected for the iPhone 6, it makes sense to assume a commensurate effect on Jabil's top-line in the next several quarters. And this will bode well for the stock. But Jabil hasn't always been this easy to read.

Analysts took some jabs at the company's management upon learning Jabil had ended its relationship with BlackBerry (BBRY). But as I wrote several months ago, it was only BlackBerry. It's not as if BlackBerry was contributing to Jabil's growth. Had this occurred a decade ago it would have been a much different story.

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