CSFB Lowers Jabil's Rating Based on Economic Realities

The sheer size and speed of the economic downturn in technology has caught investors, money managers and even analysts by surprise.

In a note to investors about Jabil Circuit (JBL), an electronics manufacturing service provider, a pair of Credit Suisse First Boston analysts did just that -- admit that the slowdown's magnitude has caught them off guard.

"We believe our error has been underestimating the severity and speed of the decline in customers business not the magnitude of the trend to outsourcing," analysts Mark Hassenberg and Herve Francois wrote.

The duo dropped Jabil's near-term rating to buy from strong buy, but stressed that this move is only the result of how bad things have gotten for EMS companies, like Jabil and Celestica (CLS), lately. Hassenberg and Francois both think that Jabil is a strong company, well positioned for the future.

"Over the past few months, investors have focused on the rapidly declining level of visibility of the EMS sector," they wrote. "Jabil has been penalized for its strong relations with Cisco (CSCO) and Dell (DELL). When Solectron (SLR) reported disappointing results, Jabil shares dropped to a level that totally ignored its outstanding results over the past several years and bright future."

Indeed, on March 20, Jabil beat Wall Street estimates, while warning that its next quarter won't come in near expectations. CSFB's analysts took that as another sign that Jabil's management was adept enough to make lemonade from a souring economic environment. But despite all the good things that Jabil has going for it, the analysts still reduced their rating and estimates on the company. Simply put, the economic situation is not good, and like it or not, Jabil's best efforts can merely minimize the damage, not eliminate it.

Excess inventory will continue to plague the electronics industry, cutting into demand and delaying product launches. The high-tech gobbledygook on shelves is like milk. At some point, it'll be out of date and no one will want it at all, which will help cut into inventories and profitability. Tech companies will experience pain in the short-term.

"Jabil's shares have appreciated 40% in the last three days," wrote Hassenberg and Francois. "Although our target price of $33 is up 32% from Friday's close, the sharp adjustment in guidance we expect from several of Jabil's key customers and the lack of visibility that exists over the near-term causes us to lower our rating."

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