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Why It Makes Sense to Stay Away From This Stock for Now

By Harsh Chauhan - Dec 25, 2013 at 1:30PM

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Jabil Circuit took a severe hit after its recent results, but is it a buy?

Electronics manufacturing services provider Jabil Circuit (JBL 3.50%) is in a very precarious position. The stock was outperforming the market in mid-September but seems to have lost its wheels. The failure of BlackBerry's (BB 13.64%) latest platform, along with Cisco's (CSCO 2.63%) weak guidance, and Apple (AAPL 3.19%) producing more units of the iPhone 5s than the iPhone 5c have collectively hurt Jabil.

Multiple headwinds
Shares took a massive hit earlier this month after Jabil's second-quarter guidance fell way behind expectations. Jabil cited a "shift in demand" at one of its major customers in the diversified manufacturing services or DMS segment. This segment had grown rapidly since Jabil started manufacturing the aluminum casing for the iPhone 5 last year.

However, things appear a bit different this year. Jabil acquired Nypro, a custom plastics manufacturer, in anticipation of more business from Apple. Apple did provide more business to Jabil with the plastic-built iPhone 5c. According to The Wall Street Journal, Jabil manufactures plastic cases for the iPhone 5c and "metal exteriors" for the iPhone 5s. But, consumers have preferred the flagship device and Apple was reportedly cutting orders for the 5c just a month after its launch. 

Jabil's disengagementwith BlackBerry is another reason why it's seeing tough times. The BlackBerry 10 device has failed to generate excitement, which shows in its catastrophic third-quarter earnings call. Revenue fell 56% from last year and its net loss came in at a massive $4.4 billion, or $8.37 per share. BlackBerry is now changing direction and has entered into a five-year long manufacturing agreement with Foxconn to develop smartphones for Indonesia and other emerging markets. 

Apple and BlackBerry accounted for 31% of Jabil's revenue in fiscal 2013, and as such, the above developments have hurt the company badly.This is why its diversified manufacturing services business, and its high-velocity solutions business are expected to drop 25% in the current quarter.The DMS business accounts for about half of Jabil's revenue so it is no surprise that the company issued a woeful outlook.

More bad stuff
Cisco is another key customer of Jabil, although it accounts for less than 10% of its revenue.Cisco dropped a bomb in November when it said that its revenue for the current quarter is expected to decline 8% to 10%. Cisco is finding it difficult to grow its business in emerging markets after recent surveillance allegations, according to Reuters. In addition, Cisco cited uncertainty in its domestic market. 

Hence, it looks like Jabil is under siege from a bunch of different sides. As such, its guidance for the current quarter turned out to be very weak. Jabil expects revenue in the range of $3.5 billion to $3.7 billion and earnings of $0.05 to $0.15 per diluted share. In comparison, analysts were expecting earnings of $0.54 per share on $4.35 billion in sales. Given such a woeful outlook, it wasn't surprising that Jabil shares fell more than 20% in a single day. 

Jabil decided to divest its aftermarket services business to iQor Holdings for $725 million. This business generated $1.1 billion in revenue last fiscal year, but Jabil management is of the opinion that the divestment will help it diversify its core manufacturing business through the addition of more engineering intensive capabilities. More importantly, this move should help Jabil improve its cash position, which is weak when compared to the amount of debt it has on its books. 

Foolish bottom line
Jabil is in a sticky position right now. Even though the company has big-name customers, it isn't able to make the most out of them, and its outlook suggests that there could be more downside ahead. So, even though the stock trades at under 9 times earnings, it might not be a good idea to buy unless you see concrete signs of a turnaround.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$147.11 (3.19%) $4.55
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$49.56 (2.63%) $1.27
BlackBerry Stock Quote
BlackBerry
BB
$5.83 (13.64%) $0.70
Jabil Circuit, Inc. Stock Quote
Jabil Circuit, Inc.
JBL
$58.17 (3.50%) $1.97

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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