Should Investors Buy This Apple Inc. Supplier Before the iPhone 6 Release?

This Apple supplier has been impressive this year, but will it be able to deliver post earnings?

Jun 7, 2014 at 5:00PM

Contract-electronics manufacturer Jabil Circuit (NYSE:JBL) has made a comeback this year. After underperforming the broader market last year, Jabil is up more than 10% so far in 2014 on the back of a strong outlook. The company's optimism can be attributed to Apple's (NASDAQ:AAPL) upcoming ramp of the iPhone 6, while strength in the enterprise business should be another catalyst going forward.

Jabil is about to release its second-quarter report on June 18. The company won't have any difficulty meeting estimates, as its outlook for the current fiscal year is well-ahead of analysts' expectations. So, the focus will be on the outlook. This is why now is a good time to check how Jabil might perform going forward, and if it can sustain its momentum.

Smartphone gains ahead
Jabil's diversified manufacturing services business is key to the company's strong performance as it contributes more than 40% to total revenue. The share of this business in the overall revenue mix has increased drastically in the past couple of years as Apple started tapping Jabil for its iPhones.

Jabil first manufactured casings for the iPhone 5 a couple of years ago. A year later, it strengthened its relationship with Apple by supplying the plastic casing for the iPhone 5c and the metal exteriors of the iPhone 5s. Now, Jabil looks well on its way to benefit from the upcoming iPhone 6.

In the last conference call, Jabil CEO Mark Mondello said that the company is going to "accelerate program ramp during the back half of this fiscal year." Additionally, Mondello went on to say that Jabil will incur "additional upfront production expenses" in the third and the fourth quarters. This further indicates that the company is on track to play a role in Apple's upcoming iPhone, which is expected to have a different design process.

Recently, Apple was granted a patent for "Methods and systems for integrally trapping a glass insert in a metal bezel." This means that Apple can now enclose either glass or sapphire inside the LiquidMetal bezel of the iPhone, according to Forbes. Hence, a different manufacturing process of the iPhone 5s successor has led Jabil to invest in its production facilities. However, management is confident that these investments will deliver positive returns, after deducting development costs.

It is expected that Apple is aiming to manufacture 80 million units of the iPhones this year, and the rumored 5.5-inch version might account for a fourth of its overall production. Such an aggressive product roll-out on Apple's part is certain to benefit Jabil.

Enterprise prospects
The enterprise and infrastructure business is Jabil's second-biggest segment with almost 35% of revenue, and it is enjoying some strong tailwinds. The deployment of LTE across the globe has breathed life into enterprise spending this year, which is expected to grow four-fold as compared to last year.

The LTE roll-out in China, where all three major telecom players have been granted licenses, is the big story this year. Around 1 million LTE towers are expected to be set up in China this year, accounting for 60% of the global build-out. Currently, China has around 300,000 LTE towers, so there's still a lot of building infrastructure that needs to be done. 

Even in the U.S., the likes of Sprint (NYSE:S) and T-Mobile are gradually building their 4G networks. Sprint's 4G network covers around 225 million people, but the company's prime focus is on its Sprint Spark service. This is an enhanced version of LTE that Sprint says will deliver three-times faster speeds in the future. Currently, Sprint Spark has been launched in six cities, but the telco plans to cover 100 million customers by the end of the year with this service. 

Even Europe is gearing up to deploy faster networks and is now focusing on 5G technology. All in all, the roll-out of faster networks across the globe should support enterprise and infrastructure spending going forward, setting the stage for Jabil's growth.

Final words
It is quite likely that Jabil will issue strong guidance once again. The company's end-market prospects are positive as its two biggest business segments are on track to benefit from two catalysts. However, in case Jabil drops post earnings, savvy investors would do well to scoop up more shares as the company's drivers are long-term in nature.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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