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Jabil Circuit Finds Defenders

Some analysts see a buying opportunity after a profit warning sparks a 25% selloff.
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Jabil Circuit

(JBL) - Get Jabil Inc. Report

plunged on Tuesday after the company warned its third-quarter profit would fall short of prior expectations, but the magnitude of the selloff had some analysts thinking investors have overreacted.

The profit warning sheared $8.50, or 26.2%, off the stock price, sending the stock recently to $23.92.

The company

lowered its EPS guidance after incurring about $20 million in unexpected charges, including costs related to the ramping of electromechanical tooling operations, execution problems at one of its U.S. plants, and higher material and labor costs in its repair program.

Excluding items like stock-based compensation charges, restructuring costs and amortization of intangibles, the company now says it will earn between 33 cents and 37 cents a share compared to its previous guidance of 43 cents a share. Revenue for the third quarter should be consistent with its earlier forecast of $2.5 billion to $2.6 billion.

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"We are disappointed with our financial performance in the third fiscal quarter of 2006 and are committed to improving our operational and financial performance," president and CEO Timothy Main, said in a statement. "Despite these short-term challenges, we are optimistic about the future. Revenues continue to show strong growth, and we continue to expect core earnings for the quarter and for the year to exceed prior year levels."

The news surprised electronics-manufacturing-services analysts, as Jabil is known for its tight execution and is considered one of the top picks in the sector. But several Jabil followers said the problems are temporary, and the selloff is a buying opportunity.

Jabil "still generates a lot of free cash flow, and they are gaining market share," said Richard Stice, an equity analyst with Standard and Poor's. He reiterated his buy rating on the stock. "If they can get these issues rectified, I think there's still significant upside potential."

"They actually are going to come in a bit higher than the midpoint of the range (on the top line). That indicates that overall demand trends remain intact," Stice said. He and his firm have no ownership or affiliation with the company and do not do any banking.

"We believe that once the initial shock subsides, cooler heads will prevail and seize upon the investment opportunity for one of the best companies in the history of EMS, now trading at 12x our conservatively revised F2007 EPS estimate," Needham analyst Richard Kugele wrote in a client note on Tuesday. His firm does not have a banking relationship with Jabil.

Stice also added that he doesn't expect a "mushroom effect" with other EMS providers.

"This appears to be a Jabil-specific manufacturing issue," agreed Amit Daryanani, an analyst with RBC Capital Markets. He said that two of the issues are related to additional vertical services -- tooling and repair -- rather than the traditional EMS assembly services. He's maintaining his sector perform rating ahead of the company's third-quarter earnings call next week.

Daryanani does not own shares of the company himself, but his firm seeks to do banking with the companies it covers.