This Cheap Apple Supplier Is Worth a Look

Contract electronics manufacturer Jabil Circuit's (NYSE: JBL  ) fourth-quarter earnings report was a disappointment, and this was not entirely unexpected. Even though the company's results were better than expected, disappointing guidance spooked investors, and shares fell almost 10% after the report.

CEO Mark Mondello said that Jabil won't be able to achieve its fiscal 2014 earnings target of $2.77 per share due to "a strong possibility of disengaging with BlackBerry (NASDAQ: BBRY  ) ."

Breaking away
BlackBerry is Jabil's second-largest customer, accounting for 12% of revenue. The Canadian smartphone maker has failed to turn its business around as the latest second-quarter loss of $965 million suggests. The BlackBerry 10 phones have failed, and the company will be reducing its workforce by 4,500, while also writing down around $900 million worth of unsold devices. 

BlackBerry plans to focus on its enterprise business, as the consumer market is now dominated by Google and Apple (NASDAQ: AAPL  ) . This move seemed inevitable, as the flagship Z10 device reportedly had return rates as high as 20% in the U.S. and Western Europe. Carriers are removing BlackBerry devices from their shelves. Hence, it's not surprising that Jabil had to reduce its earnings guidance to $2.48 a share from $2.77 per share as BlackBerry continues to falter. 

Blessing in disguise?
Management believes that apart from BlackBerry, not much has changed in Jabil's business. This could be a blessing in disguise. Jabil can now focus on its other lucrative accounts and set itself free from the negativity that's usually associated with BlackBerry.

BlackBerry might have been Jabil's second-most important customer, but the pole position is held by Apple, which contributed 19% of revenue in the previous quarter. Jabil had started manufacturing the aluminum casing for the iPhone 5 last year. Now, it looks like the company has strengthened its position after its acquisition of custom plastics manufacturer Nypro.

The acquisition of Nypro and the ramp up of iPhone production had a positive effect on Jabil's diversified manufacturing services (DMS) segment that grew 11% from the year-ago period. DMS now accounts for 44% of Jabil's total revenue and the presence of Apple as a client indicates good times ahead for this segment.  

The latest iPhones got off to a decent start with Apple selling 9 million units over the opening weekend, driven by the simultaneous launch across 11 countries, including China. Going forward, it is estimated that a total of 50 million iPhones (both the 5s and the 5c combined) will be manufactured in the fourth quarter, based on display panel shipment figures according to Digitimes.

Hence, even though BlackBerry would probably cease to be a major customer of Jabil, Apple might  more than make up for the loss going forward. Given the expected strength in DMS, where Jabil expects growth of 7% in the ongoing quarter, and the consistent performance of the enterprise & infrastructure business, Jabil might prove to be a good pick.

Some more positives
The enterprise and infrastructure business grew 9% in fiscal 2013, accounting for 30% of total revenue. Going forward, this segment's robust performance would probably continue as telecom carriers in the U.S. deploy 4G networks and more data centers are built.

The likes of AT&T and Sprint have been aggressively rolling out 4G LTE and this has benefited electronics manufacturing services providers such as Jabil. Moreover, at just 12 times trailing earnings and less than 8 times forward earnings estimates, Jabil is pretty cheap right now. Its detachment from BlackBerry is probably a good thing as investors and analysts would be now focusing on the positive sides of Jabil's business.

In addition to the cheap P/E multiples, Jabil's PEG ratio stands at 0.83, which further suggests that the stock is probably undervalued at current levels. Hence, after its recent drop, Jabil Circuit looks like a good value play.

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