Electronic manufacturing services (EMS) provider Jabil Circuit (NYSE:JBL) has been bloodied a bit lately. This has been quite a change compared to the last couple of years. Unlike peers Solectron (NYSE:SLR) and Flextronics (NASDAQ:FLEX), Jabil Circuit has managed to ride the outsourcing trend to deliver impressive growth, but operational missteps have punished shareholders recently. So, are the wheels falling off the Jabil bus or is this a great opportunity to buy shares?
Jabil's Thursday afternoon earnings report may provide some clues. The report came just nine days after Jabil's stock was hammered when the company pre-announced poor earnings for the quarter. Revenue came in just fine, up 34% year over year to $2.6 billion, but as Jabil said last week, most of the increase failed to drop to the bottom line. Net income reached $64 million, which was only 8% higher than a year ago. Meanwhile, diluted earnings per share came in at $0.30 vs. $0.29 last year.
According to Jabil, the poor bottom-line growth was due to operational issues at some U.S. manufacturing locations, higher material and labor costs, and software problems at a tooling operation. It does seem reasonable to occasionally expect operational problems for a company that's growing revenues as quickly as Jabil, but the fact that three separate issues reared their heads all at once is somewhat concerning.
Another factor that muddies the Jabil waters, at least for me, is the announcement of a realignment of capacity -- in other words, Jabil plans to close some of the higher-cost plants and move the production to lower-cost areas. While on the surface, this seems reasonable, management has stated that demand continues to be very strong. Can it really close plants and continue to meet demand -- especially with the big Christmas build coming (over a third of revenues are from consumer products) -- or does Jabil see a fall-off in demand coming down the pike?
There are other worries, too. Inventories have grown strongly over the last year -- management was able to explain away a portion of the increase, but not all. Other reasons to fret are the fact that Jabil is being investigated in relation to the stock option timing scandal, and concerns about the state of the American consumer seem to be reaching a crescendo -- our credit cards just have to be put into hibernation at some point, don't they?
All of these issues certainly warrant a decline in the stock price. At the current price around $25, Jabil has a P/E ratio of less than 19 based on trailing-12-month earnings. While EMS provider Benchmark Electronics (NYSE:BHE) has a lower P/E, it's not growing its top line at 35%. I think that Jabil may be worth a look here, but you should perform your due diligence given the risks I've outlined.
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Fool contributor Dan Bloom owns shares of Solectron and welcomes your comments. The Fool has a strict disclosure policy.
