Jabil Is Still in Transition

NEW YORK (TheStreet) -- The last time I talked about Jabil Circuit (JBL) I said the company was going to remain in a "holding pattern" for the foreseeable future. I didn't believe it was going to take this long.

The company is in the midst of a very important transition that has been going on for almost a year. Although Jabil is one of the best brands in the electronics manufacturing service (EMS) business, the company has bigger ambitions including building its capabilities in diversified manufacturing, an area where (among others) Apple ( AAPL) is a very important customer.

Unfortunately, entering the diversified manufacturing space has come at a pretty significant cost to shareholders. After trading as high as $27.40 a year ago, the stock has fallen to $16.39 two months ago -- losing as much as 40%. I don't believe this trading pattern will remain this way indefinitely. Investors, however, remain unsure.

I don't doubt Jabil is making the right transition and taking the necessary steps to ensure its long-term viability, but I do question the aggressiveness and the toll it has taken on Jabil's core business. With third-quarter earnings due out on Wednesday, management will have a chance to change the stock's near-term trajectory.

The Street will be looking for 54 cents in earnings per share on revenue of $4.40 billion, which would represent year-over-year revenue growth of 3.5%. I think that's a bit conservative and I expect Jabil to come on the high end of its revenue guidance -- closer to $4.5 billion.

Jabil is coming off a solid second quarter during which revenue advanced 4.2% year over year to $4.42 billion. Management said the better-than-expected results were principally due to strong performance from the Diversified Manufacturing and Enterprise & Infrastructure segments, which fully offset a weak performance from the High Velocity segment.

Given the criticism that Jabil has taken, this suggests strong execution by management. Just maybe, patient investors are about to be rewarded. Assuming this momentum continues, it wouldn't surprise me to see Jabil's revenue growth for this quarter arrive closer to 4.5% to 5%.

Profitability will also be key in explaining how well this transition is progressing. Operating income of $175 million and above will also be a welcome sign. Likewise, investors should look for operating margin to come in the range of 3.8% to 4%.

That said, I don't believe much of this changes the Jabil's story. That is to say, this should not be taken as a "make or break" quarter for Jabil.

Jabil is the world's third-largest producer of electronics components. With that in mind, it's enough -- at least for now -- that progress is being made regarding the company's transition to the Diversified Manufacturing Services. As such, I believe in these situations investors should continue to exercise some patience.

I'm not by any means downplaying the risks that still remain here. There are still obstacles to overcome. Plus it's also possible that Jabil can lose business to the likes of Flextronics ( FLEX) and Benchmark Electronics ( BHE), which are also waiting to see how things play out.

As with Jabil, both Flextronics and Benchmark also have interests in diversifying their businesses. I believe they are now buying time to see what mistakes they can possibly learn from Jabil. Truth be told, I don't believe that they -- or for that matter -- Jabil had a choice here, especially given the declining PC market.

In fact, Jabil, its stock volatility notwithstanding, deserves credit for recognizing an evolution that was unavoidable. Now the company only needs to execute.

The good news is Cisco ( CSCO), one of Jabil's customers, had a solid third quarter and offered favorable guidance. I believe Cisco's strength and a resurgent BlackBerry ( BBRY) (another Jabil customer) helps Jabil's near-term outlook.

In the meantime, for investors this is a story about patience and how much confidence is there in Jabil's management to navigate the company to where it needs to go. Granted, the company lacks sex appeal. But at $19.70 per share with a price-to-earnings ratio of 10, I believe at this level there is plenty of value here.

With modest cash-flow growth and 4% to 6% revenue growth, this stock can reach a long-term fair market value of $25 to $27 per share. That's plenty of premium for minimal risk.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.

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