Jabil Circuit (JBL, Financial) has been wading through troubled waters for quite some time, and it has disappointed investors so far. Research firm RBC Capital has downgraded the company to sector perform from outperform. Moreover, Jabil also failed to impress the Street with its second-quarter results.
The reasons behind the drop
There are various reasons that can be attributed to the company’s downfall, out of which two stand out prominently. First, it lost one of its big customers, BlackBerry, and second, the plastic casing it built for the Apple iPhone 5c was a failure. Now the biggest question reeling in the mind of investors is whether they can expect a turnaround in the near future.
Jabil has a diversified manufacturing business, which declined in volume, resulting in weakness. Its revenue for the second quarter declined 14% to $3.6 billion, which was below the analysts' estimates of $3.1 billion. As already mentioned, the main reason behind this poor performance was its disengagement with BlackBerry, which was an important customer for the company.
Turnaround initiatives
But now, management is analyzing various alternatives to bring the company back on track. In a bid to improve its operations, the company is planning to incur additional production expenses. This includes automation of production processes and various other advanced engineering activities. The company is also hiring and training teams of direct labor, prototyping, and is repositioning manufacturing assets. Management expects that moving forward, these initiatives will help the company improve its operational efficiencies.
In addition, the growing smartphone market in China is a big opportunity for Jabil, along with other markets where LTE is being deployed. The company also managed to gain more than 15 new customers in its high velocity segment. This comes as a great relief for the company as well as for investors that will help them recover from the loss of Blackberry.
But Blackberry was not the only major blow for Jabil, as its demand from Apple also diminished. According to Wall Street Journal, Jabil manufactures the plastic cases for the iPhone 5c and the metal exteriors for the iPhone 5. But, as already mentioned, the plastic iPhone 5c was a failure and consequently, the phone did not perform well, which in turn hurt Jabil’s business. However, it is expected that Apple will launch two new iPhones this year with big screens, which can help Jabil to recover its lost ground.
Diversification moves
Jabil is also diversifying into other areas. It received good response in healthcare, with its Nypro healthcare team winning new designs at important customers in the areas of food and beverage, as well as consumer packaging. In addition, it has announced the construction of two new facilities in its Nypro division to support its growth in the healthcare and packaging sector. This will further enhance its product portfolio and help the company deliver better results in the future.
Conclusion
Currently, Jabil has a trailing P/E of 14, which is quite impressive. But its forward P/E seems even better at 10, which shows that its earnings will improve in the future. Although the company has been undergoing some tough times, there are various growth prospects as well, which might offset the negatives. But, these initiatives will take some time to make their mark and bring the company back on track. Considering these factors Jabil seems to be a good investment option, but from a long term point of view.
